taxes

Motor Vehicle Tax Guide

Fair Market Value Deduction (FMVD)

The fair market value deduction (FMVD) allows motor vehicle dealers, lessors and rental companies to replace vehicles; or non-qualified rental companies to trade in vehicles; without paying some or all of the motor vehicle tax when purchasing new vehicles.

An authorized dealer, lessor or rental company may deduct the fair market value (FMV) of one or more motor vehicles they retire from use from the purchase price of a replacement vehicle. The motor vehicle tax is due on the difference.

There are two types of motor vehicles involved in an FMVD:

• the new (i.e., replacement) motor vehicle(s); and
• the motor vehicle(s) removed (i.e., retired) from service.

Motor Vehicle Requirements

For a retired motor vehicle, the dealer, lessor or rental company must

• title it in the dealer’s, lessor’s or rental company’s name in Texas (unless the special rules below apply);
• have made use of it in Texas for personal or business use;
• retire it from personal or business use;
• offer it for sale prior to claiming it as a deduction; and
• use it only once as an FMVD up to 18 months after removing it from service and offering it for sale.

For the replacement motor vehicle, the dealer, lessor or rental company must

• title it in the dealer’s, lessor’s or rental company’s name in Texas; and
• purchase it for business or personal use in Texas.

Special Rules for Vehicles Titled to a Related Company

A lessor or rental company may deduct the FMV of a retired motor vehicle titled in Texas to another company if the lessor or rental company offers the retired motor vehicle for sale, and if either

• the lessor or rental company claiming the FMVD holds at least 80 percent beneficial ownership interest as the titled owner of the retired motor vehicle, or the titled owner of the retired motor vehicle holds at least 80 percent beneficial ownership interest in the lessor or rental company (these entities are often referred to as titling trusts); or
• the lessor or rental company claiming the FMVD acquires all of its motor vehicles exclusively from franchised dealers whose franchisor shares common ownership with the titled owner of the retired motor vehicle, or the titled owner of the retired motor vehicle acquires all of its motor vehicles exclusively from franchised dealers whose franchisor shares common ownership with the lessor or rental company.

Reporting the Fair Market Value Deduction

The dealer, lessor or rental company reports and claims the FMVD at the time of titling and registration of the replacement motor vehicle with the county tax assessor-collector (CTAC). Box 38, Item (c) of Form 130-U, Application for Texas Title and/or Registration (PDF), documents the FMVD.

The applicant should check the applicable box in Box 35, and describe the retired vehicle in Box 36 and, if listing additional vehicles, Box 37 of Form 130-U (PDF).

Calculating the Fair Market Value

The dealer, lessor or rental company determines the FMV in one of two ways:

• If the dealer, lessor or rental company has sold the retired motor vehicle before claiming the deduction, the FMV is the price the seller actually received from the buyer.
• If the dealer, lessor or rental company has not sold the retired motor vehicle before the purchase of the replacement vehicle, the FMV of the retired vehicle is the value on the title owner’s books at the time the owner retired the motor vehicle, provided that the owner’s book value is based on generally accepted accounting principles.

The dealer, lessor or rental company may combine the FMVs of multiple retired motor vehicles for the FMVD on one replacement motor vehicle. If there is only one retired motor vehicle, however, the FMV of that single retired vehicle cannot be split among several newer, but less expensive, replacement vehicles. A dealer, lessor or rental company cannot carry any excess value forward to other motor vehicles. Also, the use of the qualifying retired vehicles cannot reduce the motor vehicle tax due to less than zero.

A motor vehicle written off as a total loss or an unrecovered stolen motor vehicle cannot be used as an FMVD.

The owner claiming the FMVD is responsible for maintaining records that document the accuracy of the FMV of the retired motor vehicle(s).

Computing the Tax

The difference between the total purchase price of the replacement motor vehicle and the FMV of the retired motor vehicle(s) determines the amount subject to motor vehicle tax. A rental company can use the FMVD to establish its minimum gross rental receipts tax liability.

For more information regarding rental companies and the FMVD, refer to Publication 96-143, Motor Vehicle Rental Tax Guide.

96-254
(09/2021)