by Andrew Rohrlich
Understanding taxes when selling a car privately can be challenging. Buyers and sellers are often confused about who pays sales tax when selling a car privately and how much they should pay. Use the information presented in this piece to learn about different aspects of private car sale taxes.
What Are Private Car Sale Taxes?
Private car sale taxes are taxes a party must pay during a private car sale when title transfers occur. While buyers must assume tax responsibility during a private car sale, sellers may or may not have tax obligations. It is common for people to seek professional tax assistance when dealing with private car sale taxes because the rules surrounding them can be hard to decipher. Documentation is crucial when dealing with these taxes. Keep track of the notice of sale, vehicle registration, and vehicle title to make your payments more efficient.
Who Pays the Sales Tax in a Private Party Sale?
The buyer pays taxes on private car sales. They do not pay the seller but the state's department of motor vehicles when they complete their registration process. Buyers should understand that:
- The state where they pay vehicle registration and title fees will charge sales tax. This state may or may not be where they purchased the vehicle.
- They cannot avoid taxes by purchasing a vehicle in a state with no sales tax if that state is not where they will register the car and pay DMV fees.
- They pay the taxes to the DMV when they retrieve their license plates.
- If they live in a state that does not require a sales tax payment, such as Montana or Delaware, they do not have to adhere to another state's tax rate.
- In addition to state taxes, they will be responsible for the local taxes on motor vehicles within the cities or counties they reside.
Key Considerations Before Paying Motor Vehicle Sales Tax
Do not go into a private car sale blindly, be sure to:
- Track all relevant information and forms
- Look into the sales tax information for your locality
- See if you qualify for any tax exemptions
- Account for the lack of trade-in allowances in private car sales
Keep Track of All Important Documentation, Especially Purchase Price
When participating in a private car sale, be aware of the following documents and identifiers:
- Notice of Sale
- Signed Title
- Vehicle Registration
- Vehicle Identification Number
- License Plates
- Proof of Purchase Price
The proof of purchase price is vital to the DMV so they can determine whether you have fulfilled all your tax responsibilities. You want to avoid, at all costs, paying tax on motor vehicles more than you have to because you failed to keep your proof of purchase price.
Research the Sales Tax Rates and Forms For Your Jurisdiction
While pricing guides are helpful if you want to determine the sale price of a vehicle or the value of a car you received as a gift, state department of taxation websites are beneficial when you want to find out the sales tax rates for your jurisdiction and identify relevant forms. Some of these sites have simple sale questionnaires for buyers and sellers that can help them better understand their tax liability and pinpoint the documents they need to submit.
Find Out if You Qualify for Potential Exemptions
There are many types of motor vehicle tax exemptions, and you may qualify for them. There are exemptions for farmers and people who transport personal property over highways. Public service providers, such as ambulance drivers, can also take advantage of specific exemptions. Motor vehicle dealers and pawnbrokers frequently make use of the resale exemption. Certain vehicles, such as limousines or taxicabs, can receive exemptions in some states. If you qualify for one or more exemptions in your state, you may see a reduction in your sales taxes, obtain a refund if you already paid, or be required to pay no sales taxes at all.
Don't Forget - There Are No Trade-In Allowances for a Private Party Car Sale
A private party car sale is not equivalent to a trade-in. During most trade-in processes, people take their cars to a dealer and exchange them for other vehicles. During private sales, people do not trade a car for another. They obtain a vehicle in exchange for a specific amount of money. Thus, the parties involved in a private sale are not entitled to trade-in allowances and cannot receive the tax credit many states give those who can access those allowances.
Tax Returns for a Private Seller: Capital Loss vs. Capital Gain
Private car sellers can use the IRS Schedule D to determine whether they sold their car for a capital loss or gain. If it is a loss, meaning they sold it for less than what they invested, then they have no tax obligation. If it is a gain, meaning they sold it for more than what they invested in it, they must report it on their taxes because the IRS views capital gains as tax deductible. Many individual sellers will yield a capital loss after selling their vehicle because they sold it to get rid of it, not to make a profit.
This article was written by Andrew Rohrlich. As a brand and product marketing expert, Andrew Rohrlich has crafted products, experiences and communications for household names like Gap and for multiple automotive technology businesses. For nearly a decade Andrew has studied automotive retail in depth from a customer point of view and aggregated the industry’s best research, thought leadership and know how to provide credible and important information to auto shoppers and sellers.