Selling a car can be a fairly complicated and involved process. This is especially true when you sell a vehicle to a private party rather than to a dealership. Generally, a dealership will make selling a vehicle to them as easy as possible. However, you could get a bigger payout by selling your vehicle to a private party.
Figuring out taxes when selling your vehicle to a private party doesn’t have to be difficult – you just need to make the right preparations. This is especially true when it comes to taxes for selling a vehicle at a profit. As long as you have the right information and keep all of the relevant documentation, you’ll be able to handle any necessary taxes with ease. Read on to learn more about how selling a vehicle works, and the taxes you may incur.
Published: February 16, 2020. Updated March 15, 2023.
Disclaimer: We hope you found this post helpful! Nothing in this post constitutes professional, tax or financial advice. Please conduct your own research before transacting and consider talking to a qualified professional about your unique circumstances.
Keep Documentation of the Sale Price
As with all other transactions that may have tax implications, you want to keep extensive documentation when you sell a vehicle. You especially want to keep documentation that specifies the sales price For most buyers, this will be a copy of the bill of sale. Keeping documentation is crucial because how much you sell the vehicle for determines whether or not you have to pay taxes on it (and if so, how much those taxes will be).
Sales Tax When Selling a Vehicle
Many people are confused about whether they need to pay sales tax when they are selling a vehicle. Thankfully, the solution to this dilemma is pretty simple: You do not need to pay sales tax when you are selling the vehicle. However, you may need to pay taxes on any profit you acquired as a result of the sale. In other words, if you sell a car for $4,000 after buying it for $1,000 (for a $3,000 profit), you may need to pay a capital gains tax on that profit, but you don’t need to pay a sales tax on the actual transaction.
The buyer is responsible for paying the sales tax according to the sales tax rate in the jurisdiction where you sell the vehicle. The buyer will have to pay the sales tax when they get the car registered under their name. Do not let a buyer tell you that you are supposed to pay the sales tax.
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Selling a Used Car for Less Than You’ve Invested in It
The vast majority of people who find themselves selling a vehicle are selling it for less than they have invested in it. This is almost always the case when you bought a new or used car and are selling it down the road, since cars typically depreciate over time. If you’re selling a car for less than you paid for it, you will not have to pay capital gains taxes on it. This is because you did not actually generate any income from the sale of the vehicle.
Keep in mind that you have to add the money that you invested in the vehicle after the purchase to the amount that you originally purchased the vehicle for. If the amount that you sell a vehicle for is less than what you have invested in the vehicle, including the original purchase price you paid and the costs of any improvements, you will not have to pay taxes even if you sell it for a little more than what you paid for it.
For example, recalling our earlier example, let’s say that you sell a car for $4,000 after buying it for $1,000, but this time, you invested $3,500 into the car after purchasing it. That means your total investment in the vehicle is $4,500 – $500 more than what you sold it for – so you won’t need to pay a capital gains tax on the sale.
You Don’t Have to Put the Transaction on Your Tax Return If You Lost Money
If you take a loss, not only do you not have to pay taxes when you sell a car, but you also don’t even have to put the transaction on your tax return. You don’t have to report this because losing money when you sell a personal car is not tax-deductible. This may sound unfortunate, but it does save you some paperwork when it comes time for you to do your taxes. However, you will have to put the information on your tax return if you make a profit on the car because the IRS considers this a capital gain.
Selling a Car for a Profit
When you sell a car for more than it is worth, you do have to pay capital gains taxes (as we mentioned earlier), because selling a car for more than you have invested in it is considered a capital gain.
The amount of capital gains tax you will have to pay may vary depending on numerous variables, especially how much income you have from other sources. You do not have to pay this tax until you file your tax return for the year. See below for more information on how to report a capital gain from selling a car for a profit.
Keep Price Documentation When You Purchase a Vehicle
You have to prove to the IRS whether you sold the vehicle for a profit or a loss. Of course, this means that you have to keep the documentation from when you sold the car. However, it also means that you should keep the documentation whenever you buy a car.
Make sure to keep these documents in a place where they are safe and you can easily find them several years later when you do sell the vehicle. Otherwise, you may have a hard time proving whether you sold the vehicle for a profit or a loss. This could end up causing you a headache when it comes time to file your federal income taxes.
Keep Price Documentation for Modifications
As previously mentioned, the total amount you have invested in the vehicle is what determines whether or not you take a profit or a loss, which in turn determines your tax liability. The total investment in the vehicle includes modifications, such as new wheels or a premium stereo system, as these modifications may increase the value of the vehicle. It’s rare that these modifications increase the value of the vehicle enough that a loss would be turned into a profit. However, you should keep extensive documentation from any value-increasing modifications you have done to your vehicle just in case you need this documentation for tax purposes.
Reporting a Profit
You already know that you have to report any profits you receive from selling a vehicle on your tax return. However, you have to report these profits – capital gains – that you get from selling a vehicle in a very specific way. You cannot report this with the income from your job.
To report a capital gain from profiting off a used vehicle sale, you must use IRS Form 1040, Schedule D. You also have to classify this capital gain as a short-term capital gain if you owned the vehicle for less than a year. Otherwise, you will have to classify this amount on your tax return as a long-term capital gain. You may also have to enclose supporting documentation when you file your tax return. You should consult a tax professional for more details on how to correctly report a capital gain that you get from selling a used vehicle.
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Selling a Business Vehicle
Things are a little different when you sell a business vehicle. Selling a business vehicle is classified as a capital gain for the business. You will have to report this income when you file taxes for your business, not when you file personal taxes.
Keep in mind that if you are a sole proprietorship, you do not file a separate business tax return. This means that you would simply report everything, including the capital gains from selling the vehicle, on your own individual tax return. If you are part of an incorporated business and you sell a business vehicle, you should consult your tax professional so that you can determine the most advantageous way to report this income.
Taking a Loss From Selling a Business Vehicle
Remember that if you sell a personal vehicle for a loss, you don’t have to pay any taxes related to this transaction. You don’t even have to report this income when you file taxes. Things are a little different when you sell a business vehicle for a loss.
You can actually subtract a loss on a used car from any profits that your business may have seen. This could end up reducing your business’s tax liability. This strategy means that a business is better off selling a vehicle for a loss than trading it in. Again, the specifics of this can get a little complicated based on your company’s circumstances, so you should speak to your tax professional about how to claim this deduction if you find yourself in this situation.
Final Thoughts
The most important things to keep in mind when you are looking into the tax implications of selling a vehicle are holding on to all the relevant documentation and consulting a tax professional if things get a little too complex.
