What taxes do I have to pay if I sell my car privately?

Selling your car on your own may get you the most money but it means more work and there is the issue of taxes to keep in mind. Your personal vehicle is a capital asset in the eyes of the taxman and 45 states apply a sales tax to new and used car purchases.

Fortunately, as a private seller, you are not responsible for the sales tax, the buyer of your automobile is. Furthermore, if you trade in your car for another vehicle, your state may give you a tax break.

However, as the seller, if you sell your vehicle for more than you bought it for, you may be on the hook for capital gains tax. Here’s a look at what to expect.

What taxes do I have to pay if I sell my car privately?

There are only five states where you don’t have to pay sales tax on the purchase of a new or used car: Alaska, Delaware, Montana, New Hampshire, and Oregon. The other 45 states and Washington DC charge a sales tax on vehicle purchases payable by the buyer whether it is bought at a dealership, from a private seller or a relative.

Nevada is the state with the highest car sales tax which can be up to 8.25% according to Policygenius. However, the state has a unique approach as it is based on the county where it was purchased, so it could be as low as 4%. Of the states that tax car purchases, Alabama has the lowest at 2%. The online insurer provides a complete list of car sales tax rates by state.

You may also be interested in: What cars qualify for a clean vehicle tax credit?

In the event that you trade in your car at a dealership for another vehicle you may get a tax break with the trade-in value being subtracted from the purchase price of the car you are buying. Some will limit the amount like Michigan which caps the sales tax credit at $10,000. So if you trade in your vehicle for $20,000, you will only be able to subtract half that amount from the taxable purchase price of the replacement car.

There are three states that don’t allow a tax break when trading in your car for another. These are California, Hawaii and Washington DC.

As mentioned before, if you sell your car at a profit, typically when it is a vintage or collector car, you may have to pay capital gains tax as the seller.

This could also be the case if the vehicle you are selling was an asset of your business. But typically, vehicles depreciate in value, so you may be able to count the loss and deduction from your business income.

It is recommendable to keep all documents, such as vehicle history report, maintenance records and any transferable warranties, as well as expenses you’ve incurred from ownership of the vehicle in a separate folder to have available when you get ready to sell your car. Also, it is advised to talk to a tax professional to avoid any mistakes and headaches.