When selling your car, it’s important to be aware of the tax implications of such a transaction. Sales tax laws for vehicle sales vary state by state, so be sure to do some research before you start the sale 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 Internal Revenue Service 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 — and the loss could come in handy on your tax return.
The exception to this rule would be if you’re selling the car for more than you paid for it, as might be the case with a classic car, or a vehicle with extensive modifications that have increased its value enough to overcome depreciation. In that case, you’ll owe capital gains tax on the profit you make when the vehicle is sold. This won’t matter to the vast majority of car sales, though.
DMV.org shows you how to calculate your capital loss (or gain) from selling or trading in a used car. And if you’re selling your car, remember that Cars.com can help with further information on your vehicle.
Buying New? Your Trade-In May Lower Your Sales Tax
Trading in your car can bring sales tax benefits 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. There are, however, seven states that don’t offer a trade-in sales tax break: California, Hawaii, Kentucky, Maryland, Michigan, Montana and Virginia. The District of Columbia doesn’t offer this benefit, either, so you’ll pay sales tax on the purchase price including trade-in. DMV.org shows you where to look up your state’s new car sales tax rate.
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