Maybe you have a child that is graduating from school or a relative in need of a vehicle. It might even be that you know someone who is struggling financially and you would like to gift them a car. Whatever the reason, there may come a time when you would like to gift a car to someone else. Given that the process of gifting a vehicle is much different than buying one, it’s important to know the process of how it works and also understand the tax implications of giving a car to someone else.
Make Sure the Car is Paid For
You will not be able to gift a car or transfer a title unless you own the car. Therefore, if you have an outstanding balance on your car loan, you must pay it off completely before you can give the car as a gift. Be sure you obtain a copy of this final payment from your bank or dealer’s lending department to confirm the full payment.
Consider the Recipient’s Financial Situation
Even though you are gifting a car to someone else for no financial gain, you still need to go over the terms of the arrangement with the recipient. Make sure they understand that once you give them the car, they will be responsible for other costs such as gas, insurance, and maintenance. You also want to work out who will be paying the taxes and other fees associated with transferring the title. If the recipient is unable to afford the expenses associated with owning the car, you may want to reconsider your decision.
Be Prepared to Pay the Gift Tax
While there may be no sales tax, there may be a federal gift tax involved with gifting your vehicle. The requirements differ every year, but typically a gift tax is applicable when the fair market value of the vehicle exceeds $15,000 for a single person or $30,000 for a married couple. The gift tax can be anywhere between 18-40%.
Tax Implications and Legal Considerations for Vehicle Gifting
Navigating the complexities of vehicle gift transfers requires careful attention to tax regulations and legal requirements. The Internal Revenue Service (IRS) allows individuals to gift vehicles with specific tax considerations. As of current guidelines, you can gift a vehicle valued up to $17,000 per recipient annually without incurring federal gift tax reporting requirements. For vehicles exceeding this value, you'll need to file IRS Form 709, which documents the gift but typically doesn't result in immediate tax liability due to lifetime gift tax exemptions.
State-specific regulations play a crucial role in vehicle ownership transfer. Each state's Department of Motor Vehicles (DMV) has unique requirements for gift transfers, often necessitating an official affidavit of gift transfer and specific documentation. Typical requirements include proof of ownership, a completed title transfer form, and potentially a bill of sale—even for gifted vehicles.
Importantly, gift recipients should be aware of potential tax responsibilities. While the gift itself may not trigger immediate taxes, the recipient might face sales tax or registration fees depending on local jurisdiction. Consulting with a local tax professional or DMV representative can provide personalized guidance tailored to your specific vehicle gifting scenario.
Write Up a Bill of Sale
Without a formal bill of sale, there is no proof that someone else owns the car and you may still be liable. You can avoid any misunderstandings by writing up a bill of sale that includes the following information:
- Make and model of the vehicle
- Purchase price of the vehicle
- VIN
- Odometer reading
- Your signature and the signature of the giftee
Transfer the Vehicle Title
You must transfer the vehicle title to officially release ownership of the vehicle. The easiest way to transfer the title is to go to your local DMV, fill out the necessary paperwork, and pay a transfer fee. At this time you will list the price of the car as gift. Since vehicle transfer laws and fees vary by state, you may need to familiarize yourself with this information before gifting your vehicle.
Make Sure the New Owner is Insured to Drive the Car
Now that you are ready to hand the keys over, you need to make sure the giftee is properly insured to drive the car. They will not be able to legally drive the car without insurance. If the giftee already has car insurance, they simply need to contact their insurance company to add this vehicle to their existing policy. If they do not have insurance, they will need to sign up for a new policy.
