Federal Income Tax on Profit from sale of Charger?

[69Charger500]

Anybody have to deal with paying federal income tax on profit from the sale of their car?  At what point (how much profit) would this become a concern?  Any ways to avoid this?

Thanks...

[69_500]

I believe that there was a thread on this very topic on Moparts about 2 weeks ago. A tax consultant weighed in on the subject.

He said you would have to pay taxes on it, and even more if you had owned the car for more than 1 year. Only taxes on the portion that was an increase of what you paid for the car. So if you bought for $50K and sold for $60K you would pay taxes on the $10K profit.

[bull]

That's why you take cash when you sell.

[69Charger500]

So a private sale versus e-bay or Barret Jackson, etc, would provide a potential tax relief?  I suppose you could deduct any improvements made to the car above and beyond your original purchase price...

[triple_green]

What the tax law says is that you have to pay taxes on the gain. In that situation, they treat your "hobby" like a business transactions. The only tradeoff is that (like a business transacation), you are allow to offset all of your related "hobby" expenses against your gain on the sale of the car.

3X

[Blown70]

That's why you take cash when you sell.

[694spdRT]

So when you spend a fortune on a restoration and lose money on a sale do you then get to deduct the loss as well?

I can understand if it is done continually for steady income but, in that case there should be a business entity set up. It seems like a sticky subject as to what makes one of our classic cars any different than the millions of other vehicles that actually lose value for a private owner over the life of the vehicle without any allowable deductions.   

[MGBRingo]

It is the law but I would bet very very few people pay the taxes.

[triple_green]

Interestingly the IRS wants to participate in you "hobby" profits, but not your losses.

[inhrmswy]

This is exactly why you pay cash for the car and accept only cash for the sale of the car.  that way if you are cool with the buyer/seller you can put a depreciated value on the bill of sale/title.  Thats what I did when I got mine.  actually bought it for 7500 but as far as the state is concerned I only paid 500 for it.  went to dept of licensing and they didnt question it in the least.
Now on the other hand, when I bought my new truck out of state (got it in oklahoma where there is no sales tax) I was military exempt in my home state of WA.  I met all the criteria that the DOL has on their website.  They had the nerve to try and charge me sales tax on a vechicle that was not purchased in the state, at the time I was getting it registered, it had never driven on a WA road.  To top it all off my poor wife was trying to do all the leg work on this for me.  She would go into the office and they would tell her she owed the sales tax on it.  She would call the DOL up and the guy on the phone would tell her that she didnt have to pay.  Back to the office she went and same story, "you owe us XXXX$ before we will title it"  Needless to say she eventually got fed up, started taking names and eventually had the people in the DOL office call the people at the DOL HQ and let them fight it out.  End of the story, I didnt pay sales tax.   Sorry for being slightly off topic and the mild rant.

[BigBlockSam]

It is the law but I would bet very very few people pay the taxes. 

[ChgrSteve67]

I don't know anyone that has ever declared the profit from selling a car on their tax return.
Maybe because I do not know anyone that has ever made a profit from owning then selling a car.

What I can tell you is if you make a profit from selling anything you are suppose to declare it and pay taxes.
Paperwork is everything including the original bill of sale and all parts and labor receipts.

When you register a car you pay state sales tax to the Motor Vehicle People (In most cases - there are always exceptions).
OK so you get the seller to write you a bill of sale for less than what you paid for it.
You just depreciated the value of the car. What will the insurance company say if you wreck it? "you only paid $$ for it"
When you go to sell it, "IF" you make a profit your profit would be what you sold the car for minus what you paid for it minus what you put into it (Again paperwork is everything).

Now here is the catch.
If you get audited, and the auditor finds out that you did not declare your profit on the sale and appropriate taxes were not paid, you will now be selling your house to pay the fines. How much money did you save buy not declaring its sale now?

Now I think very few of us fall into this category however if you think you own a car you plan on selling for a PROFIT, keep all of the paperwork on the car and pay your taxes. After all you made a profit on the car.

Not paying tax on something you are suppose to is a crime. If you don't get caught congratulations, if you do get caught you will surely wish you had paid the taxes on it. The one thing I have learned is that the government really likes money. And when the flag goes up and they get their eye on you - you had better find yourself a good attorney. Remember they can go back 7 years and look at your tax returns and start accrewing penalties from whenever the "mistake" was made.

BJ has only brough attention to the fact the 50's, 60's and 70's cars we own today are worth more than when we bought them and the IRS is now watching.

Of course the best advice I can give is; TALK to you CPA, EA or Tax Attourney about it before buying or selling something that you plan on making money on.
And do it BEFORE completing the transaction.
They will tell you the best way to go about documenting or not documenting your transaction with the IRS.

[last426]

Anybody have to deal with paying federal income tax on profit from the sale of their car?  At what point (how much profit) would this become a concern?  Any ways to avoid this?
Thanks...

You ask if you have to pay income tax.  Well, no, not income tax per se but capital gains tax, yes.  If you have the car for more than a year then it's 15 percent on the gain.  As to ways around it, the only one that I can think of is a 1031 exchange to defer paying taxes on the gain.  

As to getting the money in cash and cheating the government, well, if you want to enter into a conspiracy (with someone you likely hardly know) to commit a crime, then you roll the dice and take the chances.  It would not be hard to trace -- where is the buyer going to come up with 40,000 cash, for instance?  How about when he goes to sell it for 50k and that buyer won't play the game?  He'll just say, "heck, I paid 40k to Joe a couple years ago" so he would only owe 1,500 on the gain.  Then it falls down on your head -- just not worth the risk to me.  

Note that this has nothing to do with sales tax (or "use" tax in some states).  That is owed locally when you buy a car -- there is no federal sales tax that I am aware of when buying a car.

Tax law is fairly simple, just a set of rules.  It's not voodoo but if you don't understand it go to a tax person who does (I agree with ChgrSteve67's post ).  It is a trap for the unwary and full of pitfalls.  Then you can make an informed decision on whether to take the risk.  Kim

[69Charger500]

Thanks for the responses.  So is the cap on Capital Gains 15%, or does it tack onto the rest of your income and end up at 25%, or more?

[Todd Wilson]

Anybody have to deal with paying federal income tax on profit from the sale of their car?  At what point (how much profit) would this become a concern?  Any ways to avoid this?
Thanks...

You ask if you have to pay income tax.  Well, no, not income tax per se but capital gains tax, yes.  If you have the car for more than a year then it's 15 percent on the gain.  As to ways around it, the only one that I can think of is a 1031 exchange to defer paying taxes on the gain.  

As to getting the money in cash and cheating the government, well, if you want to enter into a conspiracy (with someone you likely hardly know) to commit a crime, then you roll the dice and take the chances.  It would not be hard to trace -- where is the buyer going to come up with 40,000 cash, for instance?  How about when he goes to sell it for 50k and that buyer won't play the game?  He'll just say, "heck, I paid 40k to Joe a couple years ago" so he would only owe 1,500 on the gain.  Then it falls down on your head -- just not worth the risk to me.  

Note that this has nothing to do with sales tax (or "use" tax in some states).  That is owed locally when you buy a car -- there is no federal sales tax that I am aware of when buying a car.

Tax law is fairly simple, just a set of rules.  It's not voodoo but if you don't understand it go to a tax person who does (I agree with ChgrSteve67's post ).  It is a trap for the unwary and full of pitfalls.  Then you can make an informed decision on whether to take the risk.  Kim

So with this in mind everytime any of us sells ANYTHING  we should report it and take 15% out for tax?  Old tv sold at a garage sale or a 40grand Charger? Its all the same?  I dont think I have ever seen or heard anyone report a sale of an old vehicle to the IRS.


Todd

[last426]

So with this in mind everytime any of us sells ANYTHING  we should report it and take 15% out for tax?  Old tv sold at a garage sale or a 40grand Charger? Its all the same?  I dont think I have ever seen or heard anyone report a sale of an old vehicle to the IRS. Todd

In a word, absolutely yes, you would owe taxes on the gain.  So assume you buy a rare tv for 20 bucks in 1950 and have it hidden away.  Along comes 2006 and you find that the  set is worth 15,000 and you sell it.  You would owe 15 percent tax on the gain over the 20 bucks (plus more if your state, like California, also taxes the gain).  Most old tvs at garage sales (and old cars) are sold at a loss so no taxes are owed.  And likewise you would not owe taxes on the 40k charger if you paid 60k for it.  But if it sold for 100k then everything over 40 would be taxable.  And to answer the previous question, the tax is only on the gain and is not somehow added to your income -- but remember, I am only talking federal tax.  Your state may well want its share too.  Or, as I posted before, you could 1031 it to defer (but not eliminate) the taxes.  Kim

[ChgrSteve67]

To extend this a little more.
When you gamble, if your winnings for the year is say $5,000.00 you have to report that.
Now say you lost $3,500.00 in gambling in the same year, you would now only pay taxes on $1,500.00.
Keep in mind that you need to prove you lost that $3,500.00. of course if you lost more than you win you get any money collected by uncle SAM back.
DOCUMENTATION!!!
The best way to get you money from the Casino is by credit card or personal check, thus your documentation.
Most people take cash with them and gamble with no paper trail then when they hit the big one or reach a winning limit the casino makes you fill out a IRS form to report your winnings then at the end of the year they end up paying taxes on the full amount when they didn't need to.
If course the high rollers and whales know this and make the casino track their wins and losses through markers.

Playing the stock market is the same thing. There is a buy in and a payout.
If you don't keep track of it you will pay taxes on the full amount!
Tax people hate day traders and people that buy and sell stock through out the year.
It is a lot of calculating and you will pay a lot more to have your return done because of the extra work calculating what you really owe for the stock.

Another example.
If someone dies and wills you a house you had better find out the market value of that house when you get it.
10 years later the house is worth $100,000.00 more than when you got it.
If you don't know what it was worth when you got it you could pay capital gains on the actual sale price of the house instead of just the $100.000.00.

Again: TALK to your CPA, EA or Tax Attourney about these type of transactions BEFORE buying or selling something that you plan on making money on.

Documentation is everything.

[MyMopar]

I suggest you read this.  Has many interesting facts and tips.  If you keep good records from day one, you really can chop down the capital gain tax.  Read it all and then teh next time you buy a car you will be better prepared if/when you sell in the future.


THE IRS AND YOUR COLLECTOR CAR
Tuesday, March 01, 2005 / Hagerty Protection Network



Although not necessarily their primary objective, most car collectors hope to make money when they resell their cars. When that happens, the Internal Revenue Service stands ready to take its piece of the profits.

When a collector car is sold, the difference between the amount realized from the sale and the collector's basis in the car is taxable. The amount realized from the sale is pretty simple to determine. It is the sales price less the expenses of sale – broker commissions, advertising, legal fees, etc.

Keeping a good record of your selling expenses is important, as they reduce the amount realized and, therefore, the taxable gain. Some of the expenses easily overlooked include:

Appraisal fees incurred to help establish the value of the car.
The cost of detailing the car so it will appeal to potiential buyers.
Expenses for fixing all the little things that you never got around to before, otherwise the buyer could deduct for them.
The cost of transporting the car to an auction site, and all of your travel, meal and lodging expenses en route to, at, and returning from the auction.
Compensation and expenses of any employees, agents and helpers who assist in the sale.
All of these same costs incurred in unsuccessful attempts to sell the car.
Basis is the tougher term to understand. Simply put, it is your record of your investment in the car, starting with the acquisition cost. The basis is important to keep track of, as the higher the basis, the lower the gain on the sale.

The first place to reduce your taxable exposure is to be thorough about your acquisition costs. Costs incurred in locating and buying the car count. Travel, meal, and lodging expenses incurred when traveling to inspect the car, inspection costs, transport fees, etc., all count. You can also tally the costs of checking out the lemons you rejected before finding the car you actually buy. (Although this can turn into a bit of a stretch for those of us who kick tires for years before actually buying a car.) Don't forget, all of your travel, meal, and lodging expenses are fair game if you buy a car at an auction.

Once you determine your acquisition cost, making improvements to the car – but not repairs – can increase your basis. How do you tell the difference? Generally, it's a matter of degree. The fixes that count as improvements are those that extend the useful life of the car. A full restoration is unquestionably an improvement. Rebuilding or replacing the engine is also an improvement. But replacing a worn-out clutch is an ordinary repair, not an improvement, even on a Ferrari. Crash repairs are just repairs, not improvements, but repainting a weathered car is an improvement. Repairing a torn seat is a repair, but redoing a worn-out interior is an improvement.

One useful exception to the repair-improvement rule is that fixes that would ordinarily be treated as repairs can add to the basis if they are made immediately upon the purchase of the car. For example, say you buy a Shelby Mustang that needs new tires, new brakes, a new clutch, some minor bodywork, a water pump, and a new headlight. All of those fixes would ordinarily be treated as repairs, and you would not add to your basis. However, if you put the car right immediately upon purchase, these costs become part of the acquisition cost, and could add to your basis in the car.

How soon do you have to make the fixes? There is no precise time, but the sooner the better. The longer you own the car, and the more you drive it, the more they will look like repairs in the eyes of the IRS.

After determining the amount of your gain on the sale, the next point to consider is how it is treated for tax purposes. Unless the car has been used in your business, it is a capital asset. If you have owned it for a year or longer before selling it, the gain will be treated as a long-term capital gain. This is favorable, as the tax rate on long-term capital gains is lower than on ordinary income like salary and business profits. Under recent changes in the law, long-term capital gains are generally taxed at a maximum 15 percent rate. However, be aware that if the car is deemed to be a "collectible" by the IRS (a definition which is presently unclear), the maximum rate would be 28 percent. The state tax effect, if course, varies.

An attractive way to avoid paying tax is to exchange your car for another. Say you own a 1967 Corvette Stingray 427 that you bought years ago, for which you calculate your basis to be $35,000. It's worth $75,000, so you want to sell it and buy a 1983 Ferarri 512 BBi Boxer worth the same amount. If you sell the 'Vette and pay the tax, you won't have enough money to buy the Ferrari. However, if you trade the Corvette for the Boxer straight up, the gain goes untaxed as a like-kind exchange. Your $35,000 basis transfers over to the Ferrari, and your gain isn't taxed until you sell the new car.

But what if you can't find a Ferrari owner who wants a Corvette? You can still make an exchange by using an intermediary. To structure a three-way deferred exchange, first find a buyer for the Corvette. But instead of paying you for the car, have the buyer give the money to an intermediary. Then, have the intermediary use the money to buy the Boxer for you.

There are three basic requirements that you have to meet to make this work:

You have to find the new car within 45 days after the sale of your car.
The intermediary has to buy the new car and deliver title to you within 180 days after the sale of your car.
You can never have any access to the money.
Obviously, the intermediary has to be trustworthy to make this work, and it has to be an independent person, not your spouse or personal lawyer. And if you ever have possession of, or any access to, the cash, you have to pay the tax. Many companies serve as intermediaries for like-kind exchanges of real estate – they may also be willing to work on your car exchange.


While this example reflects a straight-trade, you can also trade up. Say the car you want is a perfectly restored, better-than-new 1963 Jaguar E-type that costs $100,000, so you trade the Corvette and an extra $25,000. The IRS gets zip from you, and your basis in the Jaguar becomes $60,000 – the $35,000 basis in the Corvette plus the additional cash.


But if you trade down, you pay Uncle Sam. Say the replacement for the Stingray is a 1986 Testarossa that costs $60,000, so you get the Ferrari and $15,000 in "change." The $15,000 of cash received is taxable and your basis in the Testarossa becomes $50,000 – the $35,000 basis in the Corvette plus the $15,000 gain that was taxed.

As mentioned above, a key to all of this is keeping meticulous records of your expenditures. Whenever I buy a car, I immediately set up a folder for it that I throw all my receipts and paperwork into. I don't worry too much about sorting them out as I go; I just want to be able to locate them when the tax man calls.

John Draneas is an attorney and car collector in Oregon. His comments here are general in nature and are not a substitute for consultation with an attorney.  This article originally appeared in the February 2004 issue of Sports Car Market.

[4402tuff4u]

The best solution.................................................................................don't sell it!

[Charger_Fan]

Things like this make me glad I'm a small fish.

[Telvis]

            IRS

[d72hemi]

You can make a profit with these cars . I must be doing something wrong then, I don't even want to know how fare I am in the hole for. lol

[moparjohn]

The Tax was paid on these cars when they were new. NO TAX should be collected as a used item- they aren't being sold at a store or such. I know this is not reality but I think it should be- GREEDY TAX PEOPLE!

[694spdRT]

A little off topic but, I wonder what the average amount of sales tax a car generates in its lifetime.

I you really sit and think about it the cars are taxed when new, and retaxed at every title transfer until they are junked, and then there is tax paid at "most" salvage yards for the parts off it. We are not talking small dollars anymore either with new cars and trucks selling in the 30-40K range. 

[MyMopar]

A little off topic but, I wonder what the average amount of sales tax a car generates in its lifetime.

I you really sit and think about it the cars are taxed when new, and retaxed at every title transfer until they are junked, and then there is tax paid at "most" salvage yards for the parts off it. We are not talking small dollars anymore either with new cars and trucks selling in the 30-40K range. 

You are confusing STATE sales tax and STATE property tax with FEDERAL tax.  The government doesn't see any gain when you buy a new vehicle, just the state you are in, unless you have a gas guzzler tax .  The STATE continues to get PROPERTY tax on your vehicle every year it is REGISTERED, however you get to DEDUCT the state property tax from your FEDERAL income tax each year.  When you sell the vehicle, the next person pays the STATE a sales tax, again the government see's no money UNLESS you report the sale on your 1040 tax form and the sale gained you a profit.  Bought 30k sold for 5k you get no deductions from uncle sam, however if you bought for 5k and sold for 30k and made no IMPROVEMENTS then by law you have to report the 25k as capital gain (not income).
It is all a ridiculous scam to get money for items that no one but yourself has worked for.  Lots of people get away with it becuase they never make a profit, but the few they do better watch out as Uncle Sam knows now how precious our cars are thanks to BJ and other auction houses.

[Charger_Fan]

A little off topic but, I wonder what the average amount of sales tax a car generates in its lifetime.

I you really sit and think about it the cars are taxed when new, and retaxed at every title transfer until they are junked, and then there is tax paid at "most" salvage yards for the parts off it. We are not talking small dollars anymore either with new cars and trucks selling in the 30-40K range. 

I've wondered that too.

[chargerbuck]

WHY WOULD YOU SELL YOUR CHARGER KEEP IT FOREVER

[694spdRT]

A little off topic but, I wonder what the average amount of sales tax a car generates in its lifetime.

I you really sit and think about it the cars are taxed when new, and retaxed at every title transfer until they are junked, and then there is tax paid at "most" salvage yards for the parts off it. We are not talking small dollars anymore either with new cars and trucks selling in the 30-40K range. 

You are confusing STATE sales tax and STATE property tax with FEDERAL tax.  The government doesn't see any gain when you buy a new vehicle, just the state you are in, unless you have a gas guzzler tax .  The STATE continues to get PROPERTY tax on your vehicle every year it is REGISTERED, however you get to DEDUCT the state property tax from your FEDERAL income tax each year.  When you sell the vehicle, the next person pays the STATE a sales tax, again the government see's no money UNLESS you report the sale on your 1040 tax form and the sale gained you a profit.  Bought 30k sold for 5k you get no deductions from uncle sam, however if you bought for 5k and sold for 30k and made no IMPROVEMENTS then by law you have to report the 25k as capital gain (not income).
It is all a ridiculous scam to get money for items that no one but yourself has worked for.  Lots of people get away with it becuase they never make a profit, but the few they do better watch out as Uncle Sam knows now how precious our cars are thanks to BJ and other auction houses.

I really don't think I was confusing the two. I was not taking about Federal Tax and that is why I said this is a little off topic. Whether it is at the Federal, State, or Local level it is still a governmental tax.  Regardless of who gets the tax, it is still a cost to the consumer. "Sales" tax is paid on a vehicle every time it is sold. For example, if I buy a new truck in Wisconsin for $40K that means 5% goes to the state and 0.5% goes to the county. That is $2,200 in tax paid for that purchase. In effect I paid $42,200 for the truck. Now, if I sell it in 2 years for $30K the new buyer gets to pay 5.5% on $30K again. That is $1,650 on the same vehicle so the new owner paid $31,650 for the truck.

My original question was just a pondering on how much tax is paid on the average vehicle throughout the course of its lifespan. Whether the gov't gets our money before we get it(income tax) or takes a little more from what is left(property and sales tax) was not really the issue.  

BTW: Isn't registering the vehicle is more of a "user" tax to pay for highway repair, etc.?  If I don't register the vehicle for use on a public road there really is no annual "ownership" tax in Wisconsin anyway.