Thank you so much for all your views. This has really opened my mind to different interpretations of Trade-in allowance. I read an article from Masterselling.com that a trade-in allowance which is more than the Actual Cash value of the vehicle is an over allowance, which translates into a discount from the selling price. 

If I accept that this overage above the Kelly Blue book is truly a discount from the selling price, then I am leaning on not reporting the $4000 as a personal capital gain, because the dealer has actually not bought the vehicle for the $13500, but has reduced the selling price by the excess of trade-in allowance over KBB.