If you dispose of your car, you may have a taxable gain or a deductible loss. The portion of any gain that is due to depreciation (including any section 179 or clean-fuel vehicle deduction) that you claimed on the car will be treated as ordinary income. However, you may not have to recognize a gain or loss if you dispose of the car because of a casualty, theft, or trade-in.

This section gives some general information about dispositions of cars. For information on how to report the disposition of your car, see IRS Publication 544.

Casualty or theft.

For a casualty or theft, a gain results when you receive insurance or other reimbursement that is more than your adjusted basis in your car. If you then spend all of the proceeds to acquire replacement property (a new car or repairs to the old car) within a specified period of time, you do not recognize any gain. Your basis in the replacement property is its cost minus any gain that is not recognized. See IRS Publication 547 for more information.

Trade-in.   

When you trade in an old car for a new one, the transaction is considered a like-kind exchange. Generally, no gain or loss is recognized. (For exceptions, see chapter 1 of IRS Publication 544.) In a trade-in situation, your basis in the new property is generally your adjusted basis in the old property plus any additional amount you pay. (See Unadjusted basis.)

Depreciation adjustment when you used the standard mileage rate.   If you used the standard mileage rate for the business use of your car, depreciation was included in that rate. The rate of depreciation that was allowed in the standard mileage rate is shown in the chart that follows. You must reduce your basis in your car (but not below zero) by the amount of this depreciation.

These rates do not apply for any year in which the actual expenses method was used.  

		Depreciation
	Year(s)	Rate per Mile
	2005	$.17
	2003 – 2004	.16
	2001 – 2002	.15
	2000	.14
	1994 – 1999	.12
	1992 – 1993	.11½
	1989 – 1991	.11
	1988	.10½
	1987	.10
	1986	.09
	1983 – 1985	.08
	1982	.07½
	1980 – 1981	.07

For tax years after 1989, the depreciation rates apply to all business miles. For tax years before 1990, the depreciation rates apply to the first 15,000 miles.

Example.

In 2000, you bought a car for exclusive use in your business. The car cost $18,000. From 2000 through 2005, you used the standard mileage rate to figure your car expense deduction. You drove your car 14,100 miles in 2000, 16,300 miles in 2001, 15,600 miles in 2002, 16,700 miles in 2003, 15,100 miles in 2004, and 14,900 miles in 2005. Your depreciation is figured as follows.

Year	Miles x Rate		Depreciation
2000	14,100 × .14		$1,974
2001	16,300 × .15		2,445
2002	15,600 × .15		2,340
2003	16,700 × .16		2,672
2004	15,100 × .16		2,416
2005	14,900 × .17		2,533
Total depreciation			$14,380

At the end of 2005, your adjusted basis in the car is $3,620 ($18,000 - $14,380).

Depreciation deduction for the year of disposition.   If you deduct actual car expenses and you dispose of your car before the end of its recovery period, you are allowed a reduced depreciation deduction for the year of disposition.

To figure the reduced depreciation deduction for a car disposed of in 2005, first determine the depreciation deduction for the full year using Table 4-1.

If you used a Date Placed in Service line for Jan. 1—Sept. 30, you can deduct one-half of the depreciation amount figured for the full year. Figure your depreciation deduction for the full year using the rules explained in this chapter and deduct 50% of that amount with your other actual car expenses.

If you used a Date Placed in Service line for Oct. 1—Dec. 31, you can deduct a percentage of the depreciation amount figured for the full year. The percentage you use is determined by the month you disposed of the car. Figure your depreciation deduction for the full year using the rules explained in this chapter and multiply the result by the percentage from the following table for the month that you disposed of the car.

Month	Percentage
Jan., Feb., March	12.5%
April, May, June	37.5%
July, Aug., Sept.	62.5%
Oct., Nov., Dec.	87.5%

Do not use this table if you are a fiscal year filer. See Sale or Other Disposition Before the Recovery Period Ends in chapter 4 of IRS Publication 946.

Parking fees. 

Fees you pay to park your car at your place of business are nondeductible commuting expenses. You can, however, deduct business-related parking fees when visiting a customer or client.

Advertising display on car.   

Putting display material that advertises your business on your car does not change the use of your car from personal use to business use. If you use this car for commuting or other personal uses, you still cannot deduct your expenses for those uses.

Car pools.   

You cannot deduct the cost of using your car in a nonprofit car pool. Do not include payments you receive from the passengers in your income. These payments are considered reimbursements of your expenses. However, if you operate a car pool for a profit, you must include payments from passengers in your income. You can then deduct your car expenses (using the rules in this publication).

Hauling tools or instruments.   

Hauling tools or instruments in your car while commuting to and from work does not make your car expenses deductible. However, you can deduct any additional costs you have for hauling tools or instruments (such as for renting a trailer you tow with your car).

Union members' trips from a union hall.   

If you get your work assignments at a union hall and then go to your place of work, the costs of getting from the union hall to your place of work are nondeductible commuting expenses. Although you need the union to get your work assignments, you are employed where you work, not where the union hall is located.

Office in the home.   

If you have an office in your home that qualifies as a principal place of business, you can deduct your daily transportation costs between your home and another work location in the same trade or business. (See IRS Publication 587, Business Use of Your Home, for information on determining if your home office qualifies as a principal place of business.)

Examples of deductible transportation.   

The following examples show when you can deduct transportation expenses based on the location of your work and your home.