Disposing Of A Vehicle - Things to Consider

Trade-In Your Vehicle

Even though you may be able to sell your car for more if you sell it yourself, trading it in at a dealer eliminates the hassle of selling a car. This is why so many people choose this option when they’re looking for their next car. The 2017 tax reform allowed a gain resulting from the disposition of a partially-used vehicle to be deferred, meaning it was better to trade in the vehicle than to sell it. Trading in or selling to a third party is no longer an option, and it is treated as a sale whether you trade it in or sell it.



In most cases, there is little difference between selling or trading in a car that has been used exclusively for personal purposes since the vehicle will have declined in value. Except in very rare cases, there would be no gain from the sale. Tax law prevents deductions for losses incurred when selling personal-use property. By contrast, the law states that profits on personal-use items such as vehicles are taxable if they are sold for a profit.

If you used the car for business- you must report a gain or loss on your tax return upon the sale of the car. This will be determined based on the “portion” of the vehicle used for business, compared to the “portion” used for personal reasons. To determine this, it is highly recommended that you speak with a tax professional.

Sell the Vehicle

The Internet age has resulted in a variety of websites offering values for used vehicles, such as Kelly Blue Book. You can also sell your car to a used car dealer who will handle the DMV paperwork for you. If you decide to sell it yourself, you can use online websites such as Craigslist, or you can even place a "for sale" sign on the car as long as you ensure that the title is properly transferred. You should also be cautious of potential buyers to avoid being scammed by hot checks or future payments. Vehicles are sold "as is" in most states, provided a material defect is not concealed. 

During the COVID-19 pandemic, there have been several reports that auto dealers are experiencing a shortage of inventory, and the result has been that used cars are being valued at a higher price compared to those that were sold earlier, allowing owners to sell their used automobiles at a profit when the inventory is scarce. As a seller, you may not be aware that you will have a taxable gain if you sell your home.

Gift It to Someone

Old cars are often gifted to children, family members, or acquaintances. A vehicle's fair market value (FMV) must be less than $15,000 for gift tax purposes in order to avoid gift tax ramifications. As long as both spouses make the gift jointly, each spouse is entitled to the annual gift tax exclusion; thus, the vehicle can be worth as much as $30,000 without incurring any tax consequences. Gift tax returns are required if the FMV of that vehicle exceeds those limits. Despite the fact that the person to whom the car is given is "needy," direct gifts of a vehicle are not deductible on a beneficiary's tax return as charitable contributions.

Donate the Vehicle to Charity

You've probably seen ads encouraging you to donate your car to charity. It is possible that donating a vehicle does not result in a significant tax deduction, or no deduction at all. Several years ago, many charities promoted this kind of donation. Congress had to step in because taxpayers abused vehicle donations by claiming values higher than their actual value. In some cases, charitable deductions are limited to $500 due to a number of rules.

By requiring higher substantiation requirements and making the deduction contingent on the charity's use of the vehicle, the deduction is limited for motor vehicles (as well as boats and airplanes) contributed to charity that claim a value over $500.

Understanding Charitable Deductions

The charitable deduction cannot exceed the gross proceeds the charity receives from the sale, unless there is any specific and significant use in support of the organization’s regular activities. A significant intervening use could be delivering meals every day for a year to the needy or elderly or driving 10,000 miles to deliver meals over a year.

Donors' auto contribution deductions are not limited when the charity sells the item for a significant discount (or gives it away) to a needy person. Vehicles may be provided to needy individuals if they are directly used to further the charitable purposes of the donor, such as providing transportation aid to the poor. The amount of the contribution is determined by the fair market value of the vehicle.

There is a further restriction on the deduction of a vehicle donation whose value is greater than $500. It is not permitted unless a contemporaneous written acknowledgement of the contribution is provided by the beneficiary. In order for the acknowledgement to be contemporaneous, either a contribution must be made within 30 days of the contribution being made, or a vehicle must have been disposed of by the organization that makes the contribution. It is required that the donor includes a copy of the acknowledgment with their tax return in order to claim the deduction.

Final Thoughts

It is important for the donee organization to acknowledge whether it provided the vehicle in exchange for goods or other services, as well as providing a description and a reasonable estimate of its value, or, if it consists only of intangible religious benefits, stating such. The donee (charitable organization) must complete Form 1098-C, which incorporates all the acknowledgement elements required. Donors claiming a deduction for contributions of a motor vehicle, boat, or airplane must attach copy B of the 1098-C to their federal tax returns.

Please let us know if you have any further questions in a free YokeTax consultation.