Taxes When Selling a Vehicle Quick Facts
- In most states, if you’re selling your car as a trade-in, you may get a break on tax for another new or used vehicle at the dealership.
- If you used the vehicle for business purposes, you might be able to deduct expenses related to selling the car on your income tax return.
- If you sell a vehicle for more than what you paid, you may be subject to capital gains tax.
Selling a vehicle can be intimidating, but it’s approachable when you know what mistakes to avoid. Learn how taxes may apply to a car sale so that you can prevent unexpected liabilities or penalties after the transaction. Laws and regulations will vary by state, but we’ll tell you about the tax implications you need to know before you sell the vehicle.
NOTE: Consult a tax professional to help navigate your specific tax matters.
- Sales or Ad Valorem Tax
- Income Tax
- Capital Gains Tax
- Donating a Car
Sales or Title Ad Valorem Tax
Sellers aren’t responsible for sales tax when someone buys their automobile. Buyers living in one of the 45 states that charge sales tax on used cars must pay it whether purchasing from a dealership, private seller, or their relative. When trading your car, consider taxes when determininghow much you can afford for another vehicle. Use our car affordability calculator to help you with that important task. Alaska, Delaware, Montana, New Hampshire, and Oregon residents do not pay sales tax when buying a car.
Many states that levy a vehicle sales tax allow you to get a break on the tax if you trade in your car at a dealership to buy another new or used vehicle.
PRO TIP: If your state allows the tax reduction, find out in advance if there’s a limit on that amount to avoid an unwelcome surprise when you trade.
For example, if the purchase price of your new sedan is $40,000, and you trade in an SUV for $15,000, the dealer can apply the trade-in value to the cost of the car. This will bring the purchase price down to $25,000. The taxes on a $25,000 sale will be lower than those on the original $40,000.
However, California, Hawaii, and Washington, D.C., do not allow buyers to deduct their trade-in value from the purchase price of a new or used car before calculating taxes.
Always check your state’s laws and regulations to determine your tax liability. For example, in Michigan, when trading a car, owners receive a sales tax credit for the vehicle’s trade-in value of up to $10,000.
Used Vehicle Buyer’s Tax
Most states tax used vehicle buyers, including in private sales. When selling a car to someone across state lines, the tax rate or type depends on the buyer’s residence. If you’re selling the car privately, the buyer is typically responsible for payment when presenting the bill of sale and registering the vehicle in the state where they live.
The tax amount will be included with any other fees associated with the transfer (title fees, registration fees, etc.). Buyers should check their state’s laws and regulations to determine tax liability.
RELATED: 10 Mistakes to Avoid When Selling a Used Car
Income Tax
You may be able to deduct expenses related to the sale of the car on your income tax return if you used the vehicle for business purposes. This includes things like listing fees, repairs, and advertising costs.
Additionally, if you used the vehicle for business mileage, you may be able to deduct the vehicle’s depreciation. Keep accurate records of any expenses related to the car’s sale to ensure you deduct the appropriate amount.
If the car was a personal asset, report the sale on an Internal Revenue Service (IRS) Form 1040, Schedule D. If you used it for business purposes, report the sale on Form 4797 or Form 8824. Again, using a certified public accountant or professional tax preparer can help ensure you’re filing correctly.
Capital Gains Tax
When you sell a vehicle for more than what you paid, you could be subject to capital gains tax. In this case, the profit can be considered taxable income. Liability varies depending on your income level and other factors.
According to the IRS:
“The tax rate on most net capital gain is no higher than 15% for most individuals. Some or all net capital gain may be taxed at 0% if your taxable income is less than or equal to $44,625 for single and married filing separately, $89,250 for married filing jointly or qualifying surviving spouse, or $59,750 for head of household.”
Be sure to keep accurate records of the purchase and sale of the vehicle so you can calculate any capital gains tax owed.
MORE:Can You Buy a Car Without a License?
Capital Gain vs. Capital Loss
As mentioned above, capital gain refers to the profit you make when you sell an asset for more than your purchase price. For example, if you buy a car for $20,000 and sell it for $25,000, you have a capital gain of $5,000. Capital gains can be taxed, and the rate will mostly depend on how long you held the asset before selling, depending on your current income level.
Alternatively, capital loss applies when you sell an asset for less than you paid. Using the same example, if you bought a car for $20,000 and sold it for $10,000, you would have a capital loss of $10,000. In some cases, capital losses can offset capital gains by reducing your tax liability. You may also be able to deduct a portion of capital losses from your taxable income.
RELATED: How to Sell a Car: 8 Necessary Steps to Follow
Taxes When Donating a Car
If you donate your vehicle to a charitable organization, you can likely claim a tax deduction for the vehicle’s fair market value. You may need to get the vehicle appraised by a professional. Additionally, the deductible amount will depend on the vehicle’s value when you hand over the donation, and the IRS must recognize eligible charities. Any financial benefit from donating your car depends on your financial situation, including whether your additional itemized deductions exceed the standard deduction for federal and state income tax returns.
Read Related Articles:
- How to Sell a Car With a Loan
- Selling a Car: Trade It In or Sell It Yourself?
- Can You Buy a Car With a Credit Card?
Editor’s Note: This article has been updated since its initial publication.
