You do not have to pay sales tax on a vehicle that you trade in toward a new purchase. In fact, many states recognize that buyers have already paid tax on a trade-in vehicle. If your state allows, you can deduct the amount of your trade-in's value from your new vehicle's purchase price before applying the sales tax.
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To find out about your state and area's tax rules and charges, call your state motor vehicle department or visit its website. Or ask the dealership you're purchasing from. Dealers are authorized to collect all applicable state taxes, motor vehicle fees and inspection or emissions costs. You may find that your state recognizes your trade-in as a tax deduction, which you can use to your advantage when budgeting or determining a loan amount. You may not have to provide as much of a down payment as you originally thought.
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Used Car Purchase
In states that offer a tax deduction when a trade exists, expect to receive your discount from the vehicle's total sales price when purchasing a used car. A new car's actual sales price is viewed differently by each state, but that's not so for a used car purchase. So if you purchase a used car from a dealership that costs $10,000 and have a trade-in worth $3,000, you'll pay taxes on $7,000 instead. If your area's tax rate is 10 percent, you'll save $300 on tax charges.
New Car Purchase
Some states recognize a new car's taxable price as the manufacturer's suggested retail price, or MSRP, without regard to rebates. If you purchase a $25,000 vehicle with $5,000 in rebates, your taxable price is still $25,000. You can then subtract your trade-in value from the MSRP before applying tax. States that don't recognize the rebate as a reduction in taxable price will often honor a dealer discount. For example, if a dealership took $2,000 off the MSRP of the same vehicle, you can subtract your trade-in value from $23,000 before applying tax charges. After adding the tax amount, you can deduct the rebate.
Financed Trade-In Vehicle
Sales tax is based in most states upon the new vehicle's selling price minus your trade-in's value. A trade-in vehicle with an active loan is no different. If you owe $15,000 on a vehicle that has a trade-in value worth of $12,000, you'll apply the extra $3,000 toward your total purchase price or amount financed. Your dealership must pay off your previous loan to take ownership of your trade-in. Even if your purchase price increases because of your loan's payoff, you won't pay taxes on the excess loan amount or total purchase price.