Car transactions can be complicated and stressful. From tags and titles to financing and insurance, there’s a lot to think about. But what about taxes? If you’re donating or selling a vehicle, there are some tax rules and issues you need to know about.
Tax Implications of Donating a Car
As you probably know, there are tax breaks for donating items to charities. You’ve likely taken old household items to Goodwill or dropped off clothing at the Salvation Army. In return, they hand you a paper receipt that gives you room to jot down an itemized list of your donations and the values associated with them. When you think about it, it’s all pretty unofficial.
If you’d like to donate a car or truck to charity, the process is a little more official. First, you have to make sure you’re donating to an IRS-approved charity that has an “exempt status.” If it doesn’t have this status, it at least needs to be a 501c(3) organization. (Most charities will proudly display their qualifications, but you can always check the IRS website for a list of exempt organizations.)
The big question is: how much can you claim as a deduction when donating a vehicle? This is where it gets slightly complicated. It used to be that you could claim the car’s full market value, but the IRS has changed this policy in recent years.
While there are some situations in which you can claim fair market value, you typically have to deduct the selling price – i.e. the amount the charity gets when they sell or auction the vehicle.
Since the market value is generally much higher than the selling price a charity receives, most people would prefer to deduct the fair market value. There are four specific situations in which the IRS allows for this:
- If the charity sells the car for less than $500, you are allowed to claim the lesser of the fair market value or $500. For example, if the charity sells your vehicle for $300 and the market value is $450, you can claim a deduction for $450.
- If the charity decides to make an intervening use of the vehicle for reasons that relate to their mission – such as delivering clothes, hauling supplies, or transporting volunteers – you can claim a fair market value deduction.
- If the charity makes a material improvement to the vehicle before selling, as a way of increasing the car’s value. (Doesn’t include minor repairs and maintenance.)
- If the charity sells the vehicle to a needy individual at a price that’s significantly below fair market value (as part of the organization’s mission).
It’s also worth noting that you always have the option to junk a vehicle. If your car isn’t in good working condition and isn’t likely to fetch much in terms of a deduction, try a salvage yard. They’ll pay you for the parts and metal. Plus, some salvage yards in Baltimore even offer free removal.
Tax Implications of Selling a Car
What about selling a vehicle? Are there tax implications when you sell a car, either to an individual or a dealer? The short answer is no.
Typically, a car is considered a depreciating asset. In other words, when you buy a car, it starts losing value from the very second you drive it off the lot. Thus, you end up selling at a loss – whether it’s one month or ten years from now. Because you don’t make a profit, the proceeds aren’t considered taxable income.
There are, however, some exceptions to this. For example, if you buy a car really cheap, fix it up, and sell it at a profit, that would be considered taxable income. Or if you’re in the business of buying and selling vintage cars at a profit, you would likely have a tax bill.
Take Everything Into Account
Whether you’re donating, junking, or selling a vehicle, every situation is unique. It’s wise to review your exact scenario with a qualified tax professional to be certain you’re doing the right thing.