Does Selling a Car Automatically Count as Income and Require Car Income Tax

January 27, 2012

There are a lot of difficult questions surrounding the sale of a car, income tax and other related payments that you may have to make to the IRS. The effect of a car sale on net income can be dramatic, depending upon the type of car that you've sold, how much it cost you originally and how much you receive for the sale of the vehicle as well. Before you begin to panic at the loss of a sizable chunk of the money that you've made off of the sale your car, take a look at your car sale tax options and the situations in which you will need to pay for the money that you've earned. It pays to take the time to become familiar with these procedures so that you can save money on your taxes.

Definition of a Car Sale for Tax Purposes

Strictly speaking, the sale of a car from an individual to another specific person (or used car dealer) is not a source of income for the seller. Thus, you will generally not be required to pay taxes off of the money that you make for a sale of this type. There are, however, a few exceptions to the rule and situations that will bring about taxation on the profits that you make.

A good general rule for your purposes as the seller is to determine whether or not you've profited off of the sale of the car. If you've earned money on the car above what you originally paid for it there's a good chance that you'll have to pay a small amount or a certain percentage of that profit in taxes. However, the most common used car sale situation is one in which the vehicle has depreciated in value somewhat over time, and the car is then sold for less money than it originally was marketed for.

Selling for Profit

If you are in the business of purchasing old and worn out vehicles, restoring them and selling them for a profit, you'll likely have to pay income taxes on your profits from this endeavor. Similarly, if you own a very old and rare car that has appreciated in value, you'll also be expected to pay some taxes on the profits that you make, depending once again upon exactly how much money you made from the sale and how much the car was originally worth.

Large Sales

If you've earned a significant amount of money from the sale of a car (typically, this number is around $10,000 or more), the deposit of a large sum of cash into your bank account may trigger an IRS investigation of your additional income. In these cases, you'll need to communicate with the IRS and a tax professional to determine if you need to pay taxes on the sale and, if so, how much money you'll owe.

Ask a tax professional for more advice.

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