If you want to get rid of your car and get a new one, the simplest option is to trade or sell it to a dealership. However, there are many perks to cutting out the middleman – including getting the highest profit – by selling on your own.
That also means you take on all the responsibilities: determining the price, preparing the car to sell, listing it locally or on online marketplaces, meeting and negotiating with potential buyers, waiting until the right buyer comes along, and paying the taxes.
Do you pay taxes when you sell a car? The short answer is “maybe,” because the laws on taxes for private-party sales vary by state and circumstances.
To be clear, we provide car shipping services, not tax advice. So make sure you consult a tax professional for expert advice if you are selling your car. The purpose of this post is to give you a place to start when it comes to figuring out your tax liabilities when you sell a car.
The Basics of Car Sale Taxation
Every car sale requires sales tax. In most cases, the buyer is responsible for paying the sales tax when they register the vehicle according to the state’s sales tax rate. For private car sales, the sales tax responsibility also falls on the buyer.
Depending on the purchase and sale price, the seller may be responsible for reporting the profit on the car sale. Personal vehicles are capital assets, so selling them for a profit will need to be reported with your income tax.
The rules and processes are similar across states, but states have different sales tax rates. In addition, some jurisdictions have additional tax laws that you must abide by in addition to the state laws.
Make sure you check your local tax laws for private sales of taxable assets. And since tax laws can be challenging to navigate, it’s best to consult a tax professional to understand your responsibilities and tax liability with a private car sale.
Sales Tax Implications for Private Sellers
Sales tax applies to every car sale. Usually, it’s paid by the buyer when they register the car, so the final amount depends on the state’s law. The buyer always pays the specific amount to the local DMV or at the local tags, title, and transfer location. This is always the buyer’s responsibility.
Income Tax Considerations When Selling a Car
The buyer is responsible for sales tax, but you as the seller are not necessarily off the hook for taxes. If you profit from selling your vehicle, the sale falls under the state income tax law. Personal vehicles are considered a capital asset according to the Internal Revenue Service (IRS), so you will need to register the sale as capital gain and list it in your tax filing for that year.
For example, if you bought a used car for $1,000 and later sold it for $5,000, you will need to pay taxes on the profit as capital gains during tax season. Depending on the value and your tax bracket, if you have owned the car for more than a year, the taxes may range from 0% to 20% or higher depending on the state.
Determining your profit isn’t as simple as subtracting the purchase price from the sales price, however. You will need to factor in any improvements you have made, such as new engine parts, upgraded sound system, paint, and any other upgrades that add value. This does not include routine maintenance like oil changes and new tires.
For example, if you bought a car for $1,000 and upgraded it with a $1,000 sound system, then sold it for $4,000, that’s only a $2,000 adjusted profit. You will only need to pay taxes on that $2,000.
You will handle your tax responsibility during tax season when you file your yearly taxes, which you can report to the IRS on your 1040 Schedule D form. It will be a short-term profit if you’ve owned the car for under a year or a long-term profit if you’ve owned the car longer than a year.
There are some documents you should prepare to make this process easier, including your bill of sale and the receipts for any improvements you have made. This should make it simple to calculate your profit or loss. This can get complex, so consider consulting a tax professional for guidance.
You have other responsibilities when you sell a car, however, including:
License plates: In many states, when you sell a car, you should remove the license plates. Some states require the plates to stay with the car. Once the plate is removed, you may be able to transfer it to your new car, but this can vary by state law. Some states require you to return them to your state DMV.
Insurance: In most cases, you will need to cancel the insurance on your car before the sale if you will no longer be driving it. This should be done before you transfer the title to another person.
Vehicle fees: When you sell a vehicle, there are some fees you need to take care of. Most states charge a transfer or title fee, which is a one-time fee that’s charged by the state when the title is transferred. It’s usually low (under $30).
Exceptions and Exemptions to Know About
If you sell your vehicle at a loss, you will report it as a loss on your taxes to potentially offset your taxable income and capital gains. Make sure you have records indicating what you paid and what the car sold for as verification.
Another consideration in the car’s value is the modifications you may have made. This often applies to collectible or antique vehicles that need to be restored. Your purchase price vs. your sale price may look like a profit, but you have to consider how much money you invested into materials and labor done by other parties. Only the profits are taxed as capital gains, so they fall under personal tax return filing.
Summary
Selling your car privately can get you more money for the sale, but it can involve complicated tax laws. Sales tax is not your responsibility as a private seller, but your profits may be taxable as capital gains on your income tax and need to be reported.
If you’re selling your car privately, expand your pool of potential buyers by offering car shipping to out-of-state car buyers. Contact Nexus Auto Transport to learn more and get a quote!
FAQ
Are There Tax Benefits to Trading a Car in vs. Selling It Privately?
Trading a car in at a dealership instead of selling it privately can save you on taxes for your purchase of a new vehicle. The trade-in value of your car will be deducted from the price of a new car, so the “out-the-door” price is lower, as well as the taxes you’ll owe on it.
Can the Cost of Improvements or Repairs Made on a Car Be Deducted from Taxes?
If you bought an older vehicle for a low cost, and then made improvements or upgrades, you may be able to offset your tax burden with capital gains. It depends on the purchase price, sale price, and the cost and nature of the modifications. Routine repairs and maintenance are generally not considered improvements that increase the value of the car.
Is the Seller Responsible for Sales Tax?
With private sales, the sales tax responsibility falls on the buyer according to the tax laws in their home state. The only time the seller is responsible for taxes is as a business, which requires a sales permit and registration with the state’s department of revenue to collect and pay the taxes on taxable sales. Still, the buyer is paying the taxes – you’re just collecting them and paying them to the state.
How Does Sales Tax Work When Buying a Car Across State Lines?
The state where the buyer pays the vehicle registration fees is the state that charges the sales tax. Sales tax is not paid in the state where the vehicle is purchased. For example, if you live in New York and buy a car in Delaware – a state with no sales tax – you will still need to pay tax in your home state.
If I’m Selling a Car for Less Than I Paid, Can I Claim a Loss?
If you’re trying to sell a used car for less than you pay, you will not have to pay taxes. The IRS considers personal vehicles to be capital assets, so selling a vehicle for less than your purchase price is considered a capital loss and doesn’t need to be reported on tax returns.
Should Private Car Sales Be Reported to the IRS?
If the car was a personal asset, the sale should be reported to the IRS using Form 1040, Schedule D. If the car was a business asset, the sale should be reported to the IRS using Form 4797 or Form 8824.
Can I Give My Car to a Family Member or Friend?
Most states have a process to gift cars to family members. The recipient will still need to get the title transferred and register the vehicle, however, including paying any applicable fees. Note that you will need to pay off any liens before you can give the car away. Check with your local state laws to see what gifting taxes may apply.
Is It Better to Gift a Car or Sell for a Dollar?
If you want to gift someone a vehicle, you have to transfer the title to their name and create a bill of sale. Selling a vehicle for $1 instead of gifting it could lead to the recipient paying sales tax as a percentage of the car’s fair market value. The better option is to follow the official gifting process in your state.
What States Don’t Have Sales Tax on Car Sales?
Alaska, New Hampshire, Oregon, Montana, and Delaware don’t have sales tax on used cars. Montana and Delaware don’t tax new cars, either. However, some states allow local governments to charge local taxes, so you may still have tax liability in these jurisdictions
