Does the Seller Have to Pay Tax on a Vehicle When He Sells It?

Given that most of the property you own, like your home and vehicles, are capital assets, it's difficult to sell anything at a profit without having to report it on your tax return. When a person sells a new or used vehicle that cost him less than it sold for, he may not get to pocket all of the profits. This profit he earns is a capital gain, which may cost some money in tax – especially if it's a collectible vehicle.

General Tax Rules

Provided you're not in the business of selling vehicles – meaning you only sell your personal vehicles or collection of classic cars – profits are treated as capital gains. But just because you have to report this capital gain on your tax return after the vehicle is sold, it doesn't always mean tax is owed. If you have other capital losses, such as from the sale of stocks or other investments that don't do so well, you can use them to offset the gain from the vehicle sale, as well as other types of capital gains. Capital gain treatment, however, doesn't apply to sellers who are in the business of selling cars.

Length of Ownership

The length of time you own the vehicle before selling it can have a substantial impact on the amount of tax you may owe on the gain. If you own the vehicle for more than one year, you treat the gain as a long-term capital gain – any period of ownership that's one year or less is a short-term gain and taxed at ordinary income rates, which are the same tax rates that apply to most other income you earn, such as your wages or self-employment earnings. The long-term capital gains rate you'll pay depends on the tax bracket you're in. If you're in the 10- or 15-percent tax bracket, you pay nothing, but if you pay tax under the highest 39.6-percent tax bracket, your long-term capital gains rate is 20 percent. All other taxpayers in between pay 15 percent.

Collectible Cars

When the vehicle sold is an antique or collectible car from the seller's personal collection, and he owned it for more than one year – he may have to pay a higher 28-percent rate of tax. This is because of a special provision in the law that increases the long-term capital gains rate on collectibles such as classic cars, artwork and similar items.

Tax Return Issues

Having a capital gain means you'll be filling out two extra tax forms. The details surrounding the vehicle sale, such as the dates the seller purchased and sold it, his original cost or basis, the sale proceeds and other relevant pieces of information are reported on Form 8949 in either the long-term or short-term section – whichever the case may be. Certain information from Form 8949 is then entered on a Schedule D – the form where you'll combine your capital gains and losses to arrive at a net gain or loss amount.

Photo Credits

  • Ablestock.com/AbleStock.com/Getty Images

About the Author

Michael Marz has worked in the financial sector since 2002, specializing in wealth and estate planning. After spending six years working for a large investment bank and an accounting firm, Marz is now self-employed as a consultant, focusing on complex estate and gift tax compliance and planning.

Zacks Investment Research

is an A+ Rated BBB

Accredited Business.