There are many things to consider when selling a used car; some less obvious than others, including income tax liability.
Income Tax Liability When Selling Your Used Car
In a nutshell, the Internal Revenue Service (IRS) views all personal vehicles as capital assets.
If you sell it for less than the original purchase price, it's considered a capital loss. This means you do not have to report it on your tax return.
However, if you sell it for a profit (higher than the original purchase price), or what is called a capital gain, you must report the windfall on your income tax return and pay taxes on it.
Determining Capital Gain After Selling a Car
Deciding if you must report auto sales to the IRS is fairly easy:
- Determine the original purchase price. If you don't recall, check the Bill of Sale or purchase contract.
- Subtract all taxes associated with the purchase. Depending on your state this may include sales tax, use tax, and/or wheel tax.
- Add any vehicle improvement costs to the adjusted purchase price. This does not include regular maintenance costs, only improvements. An improvement is deemed as anything that's long term, such as new paint or new stereo speakers.
- Subtract what you sold the car for from the adjusted purchase price. So if you bought the car for $14,000 and sold it for $8,000, you would have a capitol loss of $6,000. You would not have to report this to the IRS. However, if you bought it for $14,000 and sold it for $15,000, earning a $1,000 capital gain, you would report this on your tax return, using Schedule D on Form 1040 that's appropriately titled "Capital Gains and Losses." The form will instruct on you needed information.
Have you ever sold a used car? How did you handle the income tax side of things?