Things to Know About Taxes When Selling a Car

Quick Facts About Taxes When Selling Vehicles

• The buyer is responsible for paying any applicable sales tax when they register the vehicle in their state. The seller typically does not handle sales tax collection or payment in a private sale.
• Some states offer buyers a sales tax break when trading at a dealership. These breaks deduct the trade-in value from the purchase price of a new vehicle to reduce the taxable amount.
• If you sell a vehicle for more than what you paid, plus the cost of long-term improvements, the profit 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 when buying, donating, or selling 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
• Bottom Line on Taxes When Selling Cars

Sales or Title Ad Valorem Tax

Sellers aren’t responsible for sales tax when someone buys their automobiles. The person buying the vehicle is responsible for paying sales tax when they register the car in their state. If you buy a car from out of state, whether the seller is just across the state line or on the other side of the country, you will only pay the taxes to your local Department of Motor Vehicles (DMV) when registering the car.

Buyers living in one of the 46 states that charge an ad valorem, use, or sales tax on used cars must pay it whether purchasing from a dealership, private seller, or a relative.

If you’re trading your car at a dealership, consider taxes when determining how much you can afford for another vehicle. Use our car affordability calculator to help you with that important task. Alaska, Delaware, Montana, and New Hampshire residents do not pay sales tax when buying a car. Oregon levies a modest 0.50% vehicle use tax on the retail price of any taxable vehicle.

Tax Breaks on Car Trade-ins

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.

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.

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.

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 $11,000.

Used Vehicle Buyer’s Tax

Most states tax used vehicle buyers, including those 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 travel, 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 Form 1040, Schedule D. If your vehicle was business property, report the sale on IRS 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 $47,025 for single and married filing separately, $94,050 for married filing jointly or qualifying surviving spouse, or $63,000 for head of household.”

Be sure to keep receipts and accurate records regarding the costs of any improvements, such as new paint, a high-end audio system, and so forth, so you can use those expenses to offset any capital gains tax owed.

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, spend $2,000 on long-term improvements, and sell it for $25,000, you have a capital gain of $3,000. This situation is rare for personal vehicles, but it can occur for specialty, classic, and collectible cars. Capital gains can be taxed, and the rate depends 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 a similar example, if you bought a car for $20,000 and sold it for $10,000, you would have a capital loss of $10,000.

However, losses from the sale of personal-use property, such as your car, are not tax-deductible. Your tax preparer can discuss potential options regarding your tax liability regarding capital gains and losses.

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.

Taxes When Gifting a Car

There are several considerations and steps to follow when giving or receiving a car as a gift. The process begins by verifying that the giver owns the vehicle and has no outstanding loans or liens against it. Both parties should draft a bill of sale that includes the car’s details and a sales price of $0 to establish a legal paper trail. The recipient transfers the title at their local DMV and pays the transfer fee. While IRS gift tax rules may apply, most recipients are not responsible for federal taxes on the gifted car.

For inherited vehicles, recipients should consult an estate lawyer and follow probate procedures. While there is no federal inheritance tax, some states may impose one. Follow state-specific regulations to ensure a smooth and legal transfer of vehicle ownership. For example, when inheriting a car in Georgia, the recipient generally must pay the state’s Title Ad Valorem Tax at their county’s tag office. However, immediate family members in the state may be eligible for a reduced rate of 0.5% of the car’s fair market value.

Bottom Line on Taxes When Selling Cars

In general, the buyer is responsible for paying any tax on the vehicle when they register the car in their state, even if the car is purchased in a state that does not levy a sales tax on automobiles. Sellers are not responsible for any sales tax when they sell a car to another individual. However, if you sell a car for more than what you paid for it, the IRS may consider the transaction to be a capital gain that is subject to income tax. This information included here applies in most cases, but you should consult your tax professional for guidance on your specific situation.

Editor’s Note: This article has been updated since its initial publication. Chantel Wakefield contributed to the report.