Traditionally the buyer of a car is the one concerned about paying taxes. Unless it’s part of negotiations, the buyer will be required to pay all applicable fees and taxes to local authorities. However, a different type of tax may kick in if you sell your vehicle for more than you actually paid for it. In that case, it could be classified as a capital gain, which means you’re responsible for paying income tax on that money.
If you sell your car for more than you originally paid for it, you will owe capital gains tax.
If I Sell My Car Do I Have to Pay Taxes?
Cars depreciate quickly. In fact, a new vehicle is said to lose a full 25 percent of its value in the first year. For that reason, chances are when you sell your vehicle, it will be at a loss. If you lose money on the deal, you’ll owe nothing in taxes and don’t even need to report it when you file. However, if you happen into a situation where you make a profit, you’ll need to claim it on your taxes.
To determine exactly how much you’ve gained on your sale, you’ll need to locate the original purchase price of your vehicle, minus any taxes you paid when you bought it. If you made any improvements to the car, such as adding a stereo system or having it repainted, you’ll add the cost of those to the original purchase price. Do not include any money you spent on maintenance, such as oil changes or tire rotation. If the amount your buyer paid for the car is higher than what you have invested in the car, you will report the capital gain on Schedule D, Form 1040, on the line marked “Capital Gains and Losses.” If you had the vehicle one year or less before selling it, it’s a short-term capital gain. Otherwise, you’ll list it as a long-term capital gain.
Private Car Sale Tax Exceptions
If you’re selling your business vehicle, things shift a little. A capital gain becomes business income, reportable as such. However, if you lose money on the deal, you can claim this as a business loss, so for business vehicles, you’ll be better off holding on to your car until it depreciates, tax-wise.
2018 Taxes and Business Vehicles
Before the Tax Cuts and Jobs Act, you could trade a business vehicle tax-free under Section 1030. However, the new law eliminates that option, so your only choice if your car has appreciated will be to sell the vehicle and report the capital gains as business income.
2017 Taxes and Business Vehicles
If you’re filing your taxes for 2017, prior to the new tax law, you have an alternative if you want to sell a business vehicle. You can choose to either offload your business vehicle as a trade-in or private sale, but if you trade it, you can avoid the capital gains tax. This only applies if you’re sure you’ll sell your business vehicle for more than you originally paid.
Video of the Day
- Ablestock.com/AbleStock.com/Getty Images