The Advantages of Selling a Car vs. Giving It Away

The Advantages of Selling a Car vs. Giving It Away
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When you’re ready to get rid of a car, you can donate it to a charity, give it to a friend or family member or sell it. Each has a variety of advantages that can improve your personal finances. Reviewing the benefits of selling a car rather than giving it away will help you make the right decisions.

Donating a Car

If you donate a vehicle, you might be able to claim a charitable deduction and reduce the amount of income tax you owe. The amount of tax write-off you get depends on either the amount the charity sells the car for or your legitimate fair market valuation of the vehicle.

That means you’ll want to use a website like Kelly Blue Book or get a professional estimate from a car dealership. There’s one catch: If the charity sells your car for more than ​$500​, but not the fair market value, you have to use the selling price. If it sells the car for less than ​$500​, you can use the fair market value or the selling price, whichever is less. That means if your car is worth ​$600​ but sells for ​$300​, you can still get a deduction for ​$500​.

Before you agree to donate the car, find out what the charity thinks it might get for the car. Only work with a reputable charity. You’ll also need to make sure the charity is a 501(c)(3), which qualifies it to receive tax-deductible donations.

Ask if the charity will issue you an IRS Form 1098-C. You will use this information to deduct the donation on Schedule A of Form 1040. The charity should also give you a receipt that includes the date of the donation, your name, the vehicle identification number (VIN) and a description of the car.

Giving a Car to Someone

If you wish to give a car to a family member (such as a child) or a friend, you won’t get any money or a tax deduction for the gift. In fact, you might even have to pay a gift tax on the car.

For the tax year 2021, the maximum gift you can give someone is ​$15,000​ ​($16,000​ in 2022), according to the IRS. This includes one gift or a combination of several gifts totaling that amount. If you give someone a car for more than that, you’ll have a gift tax return to file, and if you ever go above the lifetime exclusion limit (​$11.7 million​ for individuals in the 2021 tax year, up to ​$12.06 million​ for 2022), you'll pay gift taxes.

Selling a Car

When you sell a car, you get to keep the income. If you sell it for more than it is worth, that’s considered a capital gain, and you’ll have to pay capital gains tax, explains When deciding between selling a car and giving it away, make sure you know what a tax deduction is.

For example, if you can ​get $1,000​ cash for a car or donate the car and get a ​$1,500​ write-off, you take the write-off, correct? Wrong.

A deduction doesn’t reduce your taxes by that amount, but rather it reduces your taxable income by that amount. So, if you donate a car and take a ​$1,500​ deduction, if your personal income tax rate ends up being 20 percent, then you pay 20 percent less on that ​$1,500​ deduction, and pay ​$300​ less in taxes – unless you change your taxable income.

Talk to a tax professional about this. If that ​$1,500​ deduction lowers your taxable income enough to bump you into a lower tax bracket, you’ll pay taxes at a lower percentage, which might make the ​$1,500​ donation's impact on your taxes worth much more than ​$300​.

Consider the Paperwork

Whether you donate, sell or gift a car, make sure you protect yourself by handling the paperwork correctly. Talk to your insurance agent to cancel the insurance on the car at the correct time so that you are not on the hook for any insurance claims made after the transfer.

Make sure the new owner takes title of the car with the state and you are completely removed from legal ownership. Always get a receipt for the transaction and at least a short, handwritten sales contract, even you are gifting a car to a family member.

If you were still paying off a loan on the car, make sure the loan company knows you sold the car (you might not legally be able to do this) and that your insurance company knows your lender should no longer be on the policy.