Do I Pay Tax on the Sale of My Car?

Normally, when you sell a car it will be sold for significantly less than what you paid for it. This is especially true if you bought a newer car and sold it a few years later, given that newer cars depreciate rapidly.

However, when you buy an older car and fix it up with improvements, you may sell it for more than what you had originally bought it for. In this case, the IRS considers the result of this transaction a capital gain. And, unfortunately, capital gains are taxable.

For example, if you buy a car for $2,000, and then turn around and sell it for $5,000, the difference between the two amounts will be taxed at capital gains tax rates. In this case, that amount is $3,000.

However, if improvements (not repairs for normal maintenance) have been added to the car, then the dollar amounts of the improvements are added to the car’s basis (the dollar amount that it cost you to acquire the vehicle).

An example of an improvement would be anything new that is added to the car to increase its value instead of helping to keep it maintained like patching a crack in a windshield. This could be new tires, a new engine, etc.

If, after factoring in improvements, the sale of the vehicle is still showing a gain, the taxpayer will be required to report it on their tax return and pay tax on the gain.

Although the gain on the sale is taxable, that does not necessarily mean that you can deduct a loss. For business-use vehicles, the loss on the sale of a vehicle can be deducted against business income. However, for personal-use vehicles, you may not deduct the loss against your other income.

The good news is that capital gains tax rates are more favorable than ordinary income tax rates. Depending on your income, your capital gains tax rate will be one of the following: 0, 15, or 20%.

 


This article is not intended to tax, legal, or financial advice. For help regarding your specific situation, please consult a local professional.

I Sold My Home. Do I Have to Report it on My Tax Return?

So you sold your home and you’re wondering whether you have to report it, whether it’s taxable, and, if it was sold at a loss, if you can deduct it against your other income?

It’s best to start at the first part of the question: Do I have to report the sale of my home on my tax return?

When you sell your home, the lending company or title company will generally issue a 1099-S. This form reports the gross proceeds from the sale of the home to the seller. This form is issued to the seller as well as to the IRS. Therefore, they will know how much money you received from the sale of your home.

Generally, if you receive a 1099-S, you must report the sale of your home on your tax return. If you do not receive a 1099-S and you meet all of the tests to have the home considered your main home, you generally do not have to report the sale on your return.

However, just because you don’t have to report it doesn’t meet it might not be a good idea to do so anyway. Reporting it on your tax return and showing why the sale is excludable may be your best bet in the event of an audit. Otherwise, you may have to go back through your records and prove that the gain on the sale is excludable in a year that has long since been forgotten.

To prove that a home is your main home you must meet a few tests. The most important test is determining that you or your spouse owned and used the house for at 2 years out of the last 5 years. Not surprisingly, the name of this test is the Ownership and Use Test.

In order to meet the ownership test, you or your spouse must be considered the owner for at least two years out of the last five years from the date of the sale.

To meet the use part of the test, you or your spouse must have lived in the house as your main home for at least two out of the five years from the date of the sale.

So Is the Gain on My Home Taxable?

Again, if you meet the ownership and use tests, you may be required to report the sale. However, you can exclude up to $250,000 if you’re single or up to $500,000 if you’re married, of gain on the sale of the home.

Can I Deduct the Loss on the Sale of My Home Against My Other Income?

Unfortunately, where the government gives with one hand, they take away with the other. Just as the gain on the sale of your main home is not taxable, the loss on the sale is not deductible.


This article is not intended to be tax, legal, or financial advice. For information regarding your specific situation, please consult a local professional.