Car Sale/Income Tax Question

[squiffy]

When I have more time, I will post the details of my car sale negotiations.

I bought a car in 1999 for 18K or so. As of Sept. 2006, it had about 70K miles on it.

I initially considered selling it. Bluebook value on the car was about 5,000 to 4,700 depending on condition.

First, question, if I had sold it, would I have had to pay any income tax? I believe the answer is clearly no. I pay 18K, sell for say 5K, so I make no profit. My cost basis exceeds my sale price.

Second question, in California, does the buyer owe a sales tax, and how does he pay it?

Third question. What if I give the car to my girlfriend as a gift. (This is what really happened.) What are the tax consequences if she sells it?

Since I gave the car as a gift, and it was worth less than $12,000, then the giver owes no gift tax. In addition, since it was a gift, she owes no income tax and I owe no income tax.

She had to pay a DMV fee to transfer the title into her name. But I assume she did not owe any sales tax, as there was a gift, and no sale.

But here is the question. If she gets a car worth $5,000 for free, then sells it for $4,700, does she owe INCOME TAX?

I would assume the answer is no. Because the cost basis of the car was $18 K. So if I couldn't make a profit selling the car at $4,700, then she could not really be deemed to have made a profit, by receiving the car as a gift, then reselling it.

We want the money as a downpayment on a new car for her.

Anyway, if anyone has a tax or accounting background, I would appreciate hearing their analysis.

[riverdance]

there are no INCOME tax issues when selling personal property (like a car that is not used for business purposes). INCOME tax for sales of business, investment, and real property only.

i'm surprised there was no SALES tax due when title was transferred. normally, the buyer owes SALES tax when a car is sold.

[squiffy]

I meant I think there is no sales tax if I give my girlfriend a $5,000 car, since there was no sale, only a gift.

Also, if I buy a car for $500 at an auction. Then sell it in the paper for $5,000. Why don't I owe a $4,500 income tax.

[riverdance]

[ QUOTE ]
I meant I think there is no sales tax if I give my girlfriend a $5,000 car, since there was no sale, only a gift. [ QUOTE ]


let's say i bought your car for 5000. i should owe SALES tax on that 5000. but if i convince you to write a letter that says you gave me the car, i would owe nothing? seems like every buyer would just say it was a gift (and the buyer would then give the seller, say, half of what it would have cost in SALES tax). you see the potential for tax evasion? that's why i thought it was strange your gf didn't owe SALES tax.


[ QUOTE ]
Also, if I buy a car for $500 at an auction. Then sell it in the paper for $5,000. Why don't I owe a $4,500 income tax.

[/ QUOTE ]

yes, you have then moved beyond using the car for personal use, and now are IN THE BUSINESS of re-selling cars. if you only did this once or twice, you could probably get away with it. but once it becomes more frequent, the irs is going to assume that you are buying the cars for INVESTMENT purposes.

[SurferEd]

I think the way they get dinged is when they register the car. The registration fee is based on the purchase price.

[WLVRYN]

I thought that there is an exemption for sales tax on non-normal course of business transactions. If you sell one car to someone, that would not be considered normal course of business, and thus no sales tax. Also, I'm pretty sure its the seller's responsibility to collect sales tax if it is due, not the buyer. If the seller doesnt collect it, it comes out of his pocket.