When it’s time to sell your car, getting the most money possible is likely your primary goal. However, it’s also important to be aware of the tax implications of the transaction. For shoppers who are trading in a vehicle, this could mean a potential tax break. But with used-car prices soaring amid the inventory shortage, some sellers may run into the opposite scenario: being forced to pay taxes if they sell the used car at a higher price than they bought it for. Sales tax laws for vehicle sales vary state by state, so be sure to do some research before you start the selling process.
Income Tax Implications for Selling a Used Car
In the vast majority of circumstances, selling your old car to a private party or to a dealer shouldn’t bring a tax bill with it. The IRS considers all personal vehicles capital assets. If you sell the vehicle for less than you bought it for, it’s considered a capital loss and any cash you make in the transaction is yours, tax-free.
The exception to this rule would be if you’re selling the car for more than you paid for it, which might be the case amid the current inventory constraints. An in-demand model, classic car or a vehicle with extensive modifications that increased its value enough to overcome depreciation are a few examples. In this case, you’ll owe capital gains tax on the profit you make when the vehicle is sold.
To calculate a capital gain on a used car, find its original price and subtract the sales tax and any additional taxes you paid. Next, add any long-term vehicle improvements you made after the purchase. Finally, subtract that total from the price you sold the vehicle for. If you end up with a positive number — meaning you gained money on the sale — you’ll have to report it on your tax return and pay taxes on that amount.
Buying New? Your Trade-In May Lower Your Sales Tax
Although selling a vehicle privately is traditionally considered the best way to get the most money for it, trading it in can bring sales tax benefits that level the playing field. If you buy another car from the dealer at the same time, many states offer a trade-in tax exemption that lowers the amount of sales tax you’ll pay in the trade. If, for example, you and the dealer negotiate a $20,000 purchase price — and you trade in a vehicle for $5,000 — the trade-in value is deducted from the new car’s cost and you’ll only be taxed on $15,000.
Not all states offer a trade-in sales tax break, however, and the tax break won’t apply in states that don’t charge taxes on car sales. That list includes Alaska, Delaware, Montana, New Hampshire and Oregon, according to NerdWallet. You can look up your state’s new-car sales tax rate on the Department of Motor Vehicles website.
More From Cars.com:
- How to Sell Your Car
- Now Is a Good Time to Sell Your Extra Used Car; Here’s Why
- Common Mistakes When Selling or Trading to a Dealer
- How Do I Sell an Older Car?
- How Does Selling to a Dealer Work?
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