Things to Know About Taxes When Selling a Car

Taxes When Selling a Vehicle Quick Facts

• In most states, if you sell your car as a trade-in, you may get a tax break on another new or used vehicle at the dealership.
• If you used the vehicle for your business, you might be able to deduct expenses related to selling the car on your business 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 automobiles. Buyers living in one of the 46 states that charge an ad valorum, use, or sales tax on used cars must pay it whether purchasing from a dealership, private seller, or relative. When trading your car, 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.

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 $11,000.

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 your vehicle was business property, 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 $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 accurate records of the vehicle’s purchase and sale so you can calculate 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 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 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. 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.

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.

Bottom Line on Taxes When Selling a Car

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.