Tax Ramifications of Disposing of a Vehicle
Trading in a Vehicle
Selling a Vehicle
Gifting a Vehicle
Donating a Vehicle to Charity
If you are buying a new car, are you wondering what to do with the old one? You actually have a number of options, some of which have tax implications and some of which don’t. These options include trading the car in with the dealer, selling it to a third party, donating it to a charity, gifting it to someone, or even keeping it as a second car. Here are the details for each. Note: This article does not discuss in detail how to treat the disposition of a vehicle used for business.
Trade-In – Although you may be able to get more for your car by selling it yourself, trading the car in with the dealer eliminates the hassle of selling the vehicle and is the option selected by many people when they purchase a new car. Prior to the passage of the 2017 tax reform, if a vehicle was used partially for business and the disposition of that vehicle would have resulted in a gain, it was better to trade the vehicle in because the tax law allowed the gain to be deferred. However, that is no longer an option, and now, whether you trade in your vehicle or sell it to a third party, it is treated as a sale.
If a car has been used 100% for personal purposes (no business use), whether you trade it in or sell it generally makes no difference since, except in rare cases, the vehicle will have declined in value and there would be no gain from the transaction. When there is a loss from the sale of personal-use property, tax law does not allow the loss to be deducted. On the other hand, the law says that when a personal-use item such as a vehicle is sold for a profit, the profit is taxable.
If the car was used partially for business, the business portion of the sale likely results in a gain or a loss that will need to be reported on your tax return for the sale year.
Sell the Vehicle – In this Internet age, a variety of online sites exist with firms that will let you know the value of your used vehicle; an example is Kelly Blue Book. There are also used car dealers that will buy your car and relieve you of all the DMV transfers and sales tax issues. Of course, you can sell it yourself through online sites such as Craigslist or perhaps by just placing a “for sale” sign in the car, in which case you need to make sure the title is properly transferred so you have no future liability. You also need to be cautious of potential buyers, to make sure someone does not try to scam you with a hot check or the promise of a future payment. In most states, vehicle sales are “as is” sales, provided you do not attempt to conceal a material defect.
News reports during the Covid pandemic are that auto dealers are experiencing an inventory shortage, which has resulted in some used vehicles being valued at as much as or more than when they were first sold a few years ago, tempting owners to sell their used autos at a profit. Many sellers may not be aware that they will have a reportable tax gain.
Gift It to Someone – It is quite common for individuals to gift their old car to a child, a family member, or an acquaintance. There are no gift tax ramifications as long as the fair market value (FMV) of the vehicle is less than the annual gift tax exclusion amount ($15,000 for 2021). Where a married couple jointly makes the gift, the annual gift tax exclusion applies to each spouse; thus, the vehicle’s value could be as much as $30,000 without any tax ramifications. If the vehicle’s FMV exceeds those limits, a gift tax return is required. The direct gift of a vehicle to an individual is not allowed as a charitable contribution on the former owner’s income tax return, even if the person to whom the car is given is “needy.”
Donate the Vehicle to Charity - You’ve probably seen or heard ads urging you to donate your car to charity. But donating a vehicle may not result in a big tax deduction or any deduction at all. A few years back, this was a popular type of charitable donation promoted by many charities. However, vehicle donations were so abused by taxpayers claiming values higher than what the vehicles were worth that Congress had to step in. The result is a number of rules that, in some cases, limit the amount of the charitable deduction to $500.
The deduction is limited for motor vehicles (as well as for boats and airplanes) contributed to a charity whose claimed value exceeds $500 by making it dependent upon the charity’s use of the vehicle and imposing higher substantiation requirements.
If the charity sells the vehicle without any “significant intervening use” to substantially further the organization’s regularly conducted activities or without any major repairs, the donor’s charitable deduction can’t exceed the gross proceeds from the charity’s sale of the vehicle. Examples of qualifying significant intervening use include delivering meals to the needy or elderly every day for a year or driving 10,000 miles during a one-year period while delivering meals.
The gross proceeds limitation on a donor’s auto contribution deduction doesn’t apply if the charity sells it at a price significantly below FMV (or gives it away) to a needy individual. This exception applies only if supplying a vehicle to a needy individual directly furthers the donee’s charitable purpose of relieving the poor and distressed or the underprivileged who need a means of transportation. In this case, the fair market of the vehicle is used to determine the amount of the contribution.
Additionally, a deduction for donated vehicles whose claimed value exceeds $500 is not allowed unless the taxpayer substantiates the contribution with a contemporaneous written acknowledgment from the donee. To be contemporaneous, the acknowledgment must be obtained within 30 days of either (1) the contribution or (2) the disposition of the vehicle by the donee organization. The donor must include a copy of the acknowledgment with the tax return on which the deduction is claimed.
Acknowledgment by the donee organization must include whether the donee organization provided any goods or services in consideration of the vehicle as well as a description and a good-faith estimate of the value of any such goods or services or if the goods or services consist solely of intangible religious benefits, a statement to that effect. Form 1098-C incorporates all of the required acknowledgment elements for the donee (charitable organization) to complete. The donor is required to attach copy B of the 1098-C to his or her federal tax return when claiming a deduction for the contribution of a motor vehicle, boat, or airplane.
If you have questions about how to treat the disposition of a vehicle, please give us a call.