Tax Implications for Selling a Used Car

Selling a used car can trigger income tax liabilities.

Most sales of used cars do not trigger tax liability. This is because the vast majority of cars are used solely for personal use and are sold for far less than they cost orginally. However, whenever you sell a car at a profit, there is a possibility you will owe taxes on some or all of the proceeds. Even if you sell at a loss and owe no income taxes on the sale, you may still need to report the sale on your tax return. Make sure you know what type of sale you have and how to deal with it when tax time comes.

Do It Yourself Sales

If you sell your car yourself, and you have used the car solely for personal use (including commuting to and from work), and you are not dealing with a collectible automobile, the only pertinent question is whether you are selling the car for more than it cost. If not, which is usually the case, there are no tax consequences, and you do not need to report the sale. (You can't claim capital losses on personal use assets.)

If, however, you are selling at a profit, you must complete Form 1040 Schedule D and pay capital gains tax on the profit. Note that if you don't sell your car for a single lump sum, but for a number of payments over time, you may need to report gain on the sale as an installment sale using Form 6252.

Sales Through Agents

If you sell your personal car through an agent, the agent may send you a Form 1099 reporting the proceeds of the sale. Because the Internal Revenue Service also receives a copy of this form, and because the IRS doesn't know how much you paid for the car in the first place, you need to report the sale on your tax return, even if you sell at a loss. Fill out Schedule D according to the instructions until your reach column (e), where you should enter zero, rather than the amount of the loss.

Trade-Ins

When you purchase a new or used car, you might trade in your current car for a discount on the purchase price. Even though you don't receive cash in this transaction, it is still considered a sale of your previous car for tax purposes. In the paperwork for the purchase, the dealership should set out the amount of the trade-in allowance. Use this amount as the sales price for your previous car in determining whether you have realized a taxable gain.

Cars Used for Work or Business

If you used your car for your work or business and claimed actual expenses rather than mileage on your previous tax returns, your basis (that is, your monetary investment) in the car is reduced by any depreciation deduction allowable. The depreciation allowance -- whether or not you claimed it on your taxes at the time -- must be "recaptured" if the car is sold at a gain.

The result of this recapture is that some or all of the gain will be considered ordinary income rather than capital gain. Furthermore, unlike with personal vehicles, you may be able to claim a loss on the sale of a business vehicle. Use Form 4797 rather than Schedule D to determine the proper tax treatment of the sale of this type of used car.

Collectible Cars

Depending on your tax bracket, a higher 28 percent tax may apply to any gain on the sale of a collectible car. This rate is incorporated into your tax return by filling out the "28 percent rate gain worksheet" in the instructions for Schedule D, the results of which are entered on line 18 of Schedule D (Part III).

References

• IRS.gov; Publication 17 -- Tax Guide 2010; 2010
• IRS.gov; Publication 544 -- Sales and Other Dispositions of Assets; 2010
• IRS.gov; Schedule D -- Capital Gains and Losses; 2010
• IRS.gov; 2010 Instructions for Schedule D -- Capital Gains and Losses; 2010
• IRS.gov; Form 4797 -- Sales of Business Property; 2010