Recapture of Prius Tax Deduction?

2986 Views 1 Reply 2 Participants Last post by Smitty, Nov 23, 2002

johnson487682

Discussion Starter · Nov 23, 2002

In a different thread, Nathan said:

Just a cautionary note. If you took the tax deduction or any state tax credits be sure to check the the terms of the program. If I remember correctly, the monies are to be returned in whole or in part if you sell your Prius before some length of time (perhaps 3 yrs?).
...
I wonder what happens if the car is totaled? Does the insurance company repay the state?

I have also wondered about this, because I bought a Prius in April, totaled it in July, and bought another in August. I believe I can claim two $2000 deductions--one for each Prius. I have not been able to find an IRS publication dealing with private ownership of a clean fuel vehicle, but chapter 12 of publication 535 deals with business ownership of a clean fuel vehicle, and I assume the rules for recapture (i.e. paying back some of your deduction) are the same for both. Here are some relevant quotes; the entire document is http://www.irs.gov/pub/irs-pdf/p535.pdf .)

Recapture of the Deductions If the property ceases to qualify, you may have to recapture the deduction. You recapture the deduction by including it, or part of it, in your income.

Clean-Fuel Vehicle Property You must recapture the deduction for clean-fuel vehicle property if the property ceases to qualify within 3 years after the date you placed it in service. The property will cease to qualify if it is changed in any of the following ways.
1) It is modified so that it can no longer be propelled by a clean-burning fuel.
2) It ceases to be a qualified clean-fuel vehicle property (for example, by failing to meet emissions standards).
3) It becomes nonqualifying property, defined earlier. [see below]

Sales or other dispositions. If you sell or otherwise dispose of the vehicle within 3 years after the date you placed it in service and know or have reason to know that it will be changed in any of the ways described above, you are subject to the recapture rules. In other dispositions (including a disposition by reason of an accident or other casualty), the recapture rules do not apply.

Nonqualifying property. This is property used in the following ways.
1) Predominantly outside the United States.
2) Predominantly to furnish lodging or in connection with the furnishing of lodging.
3) By certain tax-exempt organizations.
4) By governmental units or foreign persons or entities.

It says in an accident, recapture does not apply. Apparently, the purpose of the tax deduction is to reward people for putting a clean fuel vehicle into service, not to reward people for driving one. The act of buying a brand new hybrid qualifies you for the deduction--it doesn't matter what you do with it afterwards, as long as it remains a hybrid.

I'm no tax expert--has anyone found any information to the contrary?

Douglas (2002 Silver, Wisconsin)

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Smitty

· #2 · Nov 23, 2002

I agree you should take 2 seperate deductions as you have bought two cars. Unfortunately one has been wrecked. But from what I read from your post it was totaled but not destroyed, so sometime, somewhere, someone will drive it again. Once your insurance company fixes it and sells it in their auctions. But if it was truely destroyed and turned over for scrap, then I would say only one deduction can be made. AS this vehicle will no longer be used again. But how are you to know if all this may or may not happen. Now your insurance company may want some of that refund because they now paid for your replacement car. But who wants to get into that area.

Remember the IRS says "The Original owner qualifies for the deduction" Even if the vehicle is sold "The second owner does not qualify"

The car is still being used as a HYBRID to the best of my knowledge. And Whether I kept the car for 1 year or 10 years the car still only qualifies for one tax deduction, and is still serving its purpose.

So as far as for the word of caution by Nathan on my other post because I want to sell my car. I can take the deduction but my buyer cant, and this is what I believe the IRS is really worried about. I really dont think they are going to be knocking on my door for the next 3 years wanting to recapture for my Prius for the $500 - $700 tax deduction that I will more in reality recieve, rather then the full $2000. Who knows whats is going to happen to the car after it leaves your control from being sold.

I think all the IRS wants is ONE HYBRID - ONE DEDUCTION

Shouldnt matter whether I am the driver/owner in the next few years or Joe-Schmoe who bought it second hand and has the same desire to help keep the air quality cleaner for his childrens future.

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