One of the top questions that many people have when they sell their used car, truck, or van is if they have to pay taxes on the money from that sale.
The answer to this question is no, you do not have to pay taxes on the sale of your vehicle unless of course you actually sell your car for more than what it’s worth, or more than the vehicles original purchase price.
What most owners don’t know is that in many cases a vehicle is considered to be a capital loss which means that the owner does not make a profit on the sale of the vehicle so they do not have to declare a profit or pay taxes on the proceeds from that sale to the IRS.
The IRS Considers All Vehicles to Be Capital Assets
Even though all vehicles are considered to be capital assets the reality is that it’s not always necessary to report the sale of a vehicle to the IRS because the government regards most of the vehicles as depreciating capital assets. This means that there may not be any tax liability after the car has been sold, repairs are made, or the appropriate accessories have been installed.
There are many things to consider when selling a used car; some less obvious than others, including income tax liability.
Income Tax Liability When Selling Your Used Car
In a nutshell, the Internal Revenue Service (IRS) views all personal vehicles as capital assets.
If you sell it for less than the original purchase price, it’s considered a capital loss. This means you do not have to report it on your tax return.
However, if you sell it for a profit (higher than the original purchase price), or what is called a capital gain, you must report the windfall on your income tax return and pay taxes on it.
Determining Capital Gain After Selling a Car
Deciding if you must report auto sales to the IRS is fairly easy:
- Determine the original purchase price. If you don’t recall, check the Sailor purchase contract.
- Subtract all taxes associated with the purchase. Depending on your state this may include sales tax, use tax, and/or wheel tax.
- Add any vehicle improvement costs to the adjusted purchase price. This does not include regular maintenance costs, only improvements. An improvement is deemed as anything that’s long term, such as new paint or new stereo speakers.
- Subtract what you sold the car for from the adjusted purchase price. So, if you bought the car for $14,000 and sold it for $8,000, you would have a capital loss of $6,000. You would not have to report this to the IRS. However, if you bought it for $14,000 and sold it for $15,000, earning a $1,000 capital gain, you would report this on your tax return, using Schedule D on Form 1040 that’s appropriately titled “Capital Gains and Losses.” The form will instruct you needed information.
In reality, the only time that a vehicle can be considered to be worthy of reporting to the IRS once it’s been sold as if that car, truck or van has had new parts installed, or it was recently refurbished and the vehicle was sold for profit.
Across the United States, one of the most common reasons a vehicle for an owner paying taxes on the sale of their vehicle is if that car, truck or van was considered to be a “classic vehicle” or if it was recently refurbished.
Should you trade your car instead of selling it?
Let’s say that you plan on buying a new car or you don’t want to deal with the hassle of selling your current vehicle. In this case, one of the things that you may want to consider doing is trading in your used vehicle.
Across the United States, many car dealerships have been using the practice of trade-ins for decades. The average car dealership will look up the value of your vehicle online, typically in the Kelley Blue Book and then either give you the full trade-in value for your vehicle or offer you a trade-in value below what your vehicle may be worth.
What to Do Before Trading in Your Vehicle
Before trading in your vehicle make sure that you know what it’s really worth because there are many unscrupulous used car dealers out there who will offer you less money for your vehicle than its current value.
The truth is that every vehicle, regardless of its age, is worth something because all vehicles have valuable materials that can be recycled and parts that can be resold so if you receive a “low ball” price for your used vehicle from a dealer it may be in your best interest to recycle it.
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