Tom McParland’s latest car-buying article at Jalopnik offers helpful insights into the tax implications of reselling a used vehicle. He begins by telling readers about a recent experience he had at an auto dealership. A salesman urged him to trade in his car and warned that he’d have to pay income tax if he sells it to another individual.
If you sell a car privately, you might wonder whether you have to pay income tax on the money received. Tom explains that it depends on how much the car was when you bought it and how much you got for the car when it was sold.
Auto dealers have an incentive to discourage private car sales and promote trade-ins, so McParland knew that further investigation was merited. He consulted with a knowledgeable accountant who quickly clarified the tax consequences of reselling a vehicle. Fortunately, most drivers don’t have to worry about paying extra taxes.
In most cases, when you buy a car, it depreciates in value as soon as you leave the car lot. This would mean that if you sell the car for less than what you paid for it or an equal amount, then you won’t have to pay income tax on the money that you got for the car. However, if you only paid a small amount for the car, fixed the car and sold it for a considerable amount more than you paid, then this could be considered as a profit.
The accountant explained that the IRS doesn’t tax resale income if it isn’t producing a profit. People usually sell cars for less than they paid for them. McParland’s informative article goes on to point out that a few exceptions apply. For example, motorists have to pay taxes when they fix up old cars and resell them at higher prices.