Selling a car has income tax implications. There are different tax scenarios for businesses and individuals, and you should be aware of how the tax laws affect your personal situation.
Businesses May Owe Taxes on Sold Vehicles
Whenever businesses purchase a vehicle, and the vehicle is used in the operation of the business, depreciation for the vehicle is usually taken on a yearly basis on the income tax returns of the company or the business owner. This allows the business to receive a deduction on taxable income and reduces the amount of taxes due to the federal and state governments (if the business is located in a state that collects income tax).
Since businesses are allowed to deduct depreciation costs of a vehicle, a sale of a vehicle used for business may create taxable income. In fact, businesses are required to file IRS form 4797 and calculate any gain or loss on the vehicle. If the vehicle is sold for an amount greater than the amount that has been deducted in the form of depreciation costs on the income tax return, then that amount is taxable. If the vehicle was sold at a loss, then no income tax is due on the sale of the car.
Individuals Usually Won't Owe any Income Tax
Generally speaking, individual taxpayers very seldom sell a vehicle for more than they paid for it. Most of the time, individual buyers pay retail prices for vehicles they own. Since the sale of a vehicle by an individual usually results in a net loss, there is usually no tax liability at all connected with the sale of a vehicle from one individual to another. However, if you are somehow able to buy a vehicle at a very low price, and then turn around and sell it for a profit, that profit would be taxable as personal income.
Antique or Classic Car Considerations
Antique or classic cars may require careful consideration for income tax purposes. Most of the time, antique or classic vehicles are purchased and kept for a number of years. While an individual owns one of these vehicles, he or she may spend a lot of money on the restoration of the vehicle or in its maintenance.
When a classic vehicle is sold, it is often sold for a price much higher than was originally paid for it. In most cases this will create a tax liability to the federal government as taxable income. When selling the vehicle, you should also consider the costs of restoring it. You can also include any restoration costs in the total price you pay for the vehicle, to reduce the amount of income tax that may be due.
If the vehicle is quite used (as it older than most), it probably has very little value as a trade-in. Your best bet here, though, would likely to be to donate your vehicle to one of the many worthy causes that offer to take cars off your hands as contributions. If you opt for this route, you must have the title in hand or you cannot donate the vehicle, as you have no proof you own the vehicle. If you've merely misplaced the title to your car, then you can file for a replacement title and you can donate the vehicle. In general, you will be able to take the "trade-in" value of the vehicle as the donation to the organization. How much can you save? Generally, you will find if your car is worth $1,500 as a trade-in, then you can take this value off your taxes.