Being able to gift a vehicle is great because it can allow you to avoid paying taxes on it, depending on where you live in the US. But if you do it incorrectly, it can cost you serious money.
We’re not going to lie and say there will be no research involved on your end. The rules vary by state.
However, we’ve put everything you need to look up yourself here in this guide. It pays to do this properly.
Let’s get right to it.
- Why You’d Want To Gift A Car
- How To Gift A Car To A Family Member
- Payment Of Sales And Use Tax On The Gifted Car
- Gifting The Car Officially With A Bill Of Sale
- Proof Of Insurance For The Recipient
- Transfer Fees Involved In Gifting A Car
- Gift Taxes Involved In Gifting A Car
- Can I Just Sell The Car For $1 To My Family?
- Ongoing Costs To Operate And Own The Vehicle
- Should I let them borrow the car instead?
- Final Thoughts
Why You’d Want To Gift A Car
There are plenty of reasons to gift a car. The most common reason is that someone in your family, be it your spouse, kids, or parents, needs a car, and you’d like to surprise them, either with one of your very own cars or even a completely new car.
Maybe you’re doing it out of the goodness of your heart. Or maybe you just want an excuse to trade up to a newer car for yourself. No matter your personal reason, it’s all good. We got you.
How To Gift A Car To A Family Member
Generally, to gift a car, you have to make sure the following are taken care of:
- Payment of sales and use tax
- Bill of sale
- Proof of insurance (at least minimum liability)
- Transfer fees
- Payment of gift tax
- Ongoing costs to operate and own the gifted car
For some states, you may not have to worry about some of the above, except the last one (ongoing costs to operate and own the vehicle).
If you are a parent and is looking to finance a car for your child, check here.
Payment Of Sales And Use Tax On The Gifted Car
When you gift a car to your loved one, you’ll want to make sure they’ve got nothing to worry about in terms of unexpected expenses. One of these is the sales and use tax.
If you already own the car outright, you don’t have to worry about this.
Make sure that the car you are giving has been paid off. If you still owe payments on it, you cannot gift your car, as you won’t get the title yet until it’s fully paid off.
Part of making sure that the car has been paid off is to make sure that the taxes have been paid on it appropriately.
If they haven’t, that liability gets transferred to the new owner.
As long as you’ve paid your sales and use taxes, the person you are gifting your car to does not have to worry about paying another one.
In fact, if you live out of state from the recipient, and they live in a state where there are no taxes required, the recipient to whom you’re gifting the car may be entitled to credit in the amount you paid in taxes to originally obtain the car.
Gifting The Car Officially With A Bill Of Sale
This bill of sale is proof that you’ve signed over the car to the recipient and that they now own it outright. You technically can no longer just take it back from them, legally speaking. Of course, if you have some verbal agreements as a family, you could just abide by those rules.
The bill of sale also legally enforces responsibility by the recipient should anything in the future warrant it. You can easily Google a generic bill of sale online and have yourself and your family member sign it.
Be sure to include the Vehicle Identification Number (VIN) to make it clear which car is being signed over.
However, take note of the following 6 states:
- New Hampshire
- West Virginia
If you live in one of these states, legally you’ll need your bill of sale to be notarized. This can often be done at your local UPS store.
Proof Of Insurance For The Recipient
You’ll need to have proof of at least the minimum required insurance for the recipient upon transfer at the DMV. This will vary slightly by state, and it’s up to you if you or your loved one would like to obtain more comprehensive coverage.
You should also have a copy of the title at hand as well as the car’s registration card. This helps to ensure that the transfer goes smoothly for the two of you involved.
Transfer Fees Involved In Gifting A Car
The amount of the transfer fee varies from state to state. Your best bet is to go to your local DMV or check out your state’s DMV website to get an idea of how much this could cost.
It shouldn’t be outrageous. The basis behind the transfer fee is to cover the cost of administration time and paperwork in signing the car over, plus some. In some states, it may actually be free. Check out the following website to get an idea of how much you’ll have to pay to do a title transfer:
Remember, the above link isn’t an official DMV site for any state. It does, however, help you navigate to the appropriate site to get things done. I personally use it purely for informational purposes, such as finding out the cost of certain services should I decide to outsource it.
Gift Taxes Involved In Gifting A Car
Go to KBB.com (Kelley Blue Book site) and input your car’s information to find your car’s estimated value. This includes the make, model, year, and condition of the car.
Note whether your car’s value is over or under $15,000 and $30,000.
If the person you are giving it to is single and filing taxes as such, any car valued at $15,000 and below allows them to receive the car as a gift without paying any taxes on it.
If the person you are giving it to is married and filing jointly, any car valued at $30,000 and below allows them to receive the car as a gift without paying any taxes on it.
Otherwise, if you’re gifting a car over $15,000 to a single person or over $30,000 to a married person, they’ll have to look at their particular state laws regarding gift taxation on their car.
It can get quite hefty, often between 20% and 40%, so I personally recommend always gifting a car to single and married family members below $15,000 or $30,000 respectively. That’s usually a used car of some sort.
Can I Just Sell The Car For $1 To My Family?
You can. And initially, this would appear to be the best way to give a car to someone in your family. After all, you most definitely didn’t make any profit or capital gains off that $1 sale, so you won’t have to pay any taxes on such income.
However, if you do decide to go that route, the recipient would have to pay a sales and use tax all over again. And it’s not quite what you’d expect it to be.
The sales and use tax wouldn’t be calculated based on the $1 sale. Rather, it’d be based on the fair market value of the make, model, and condition of the car being sold.
You and your family will more than likely end up paying much more doing it this way rather than properly gifting the car instead.
Ongoing Costs To Operate And Own The Vehicle
When you gift a car, it’s not something to be taken lightly, especially for the recipient.
It’s akin to gifting someone a dog. It’s nice and thoughtful, but additional costs come with it: food, health costs, play toys, accessories, and time.
When it comes to family, you should talk about the responsibility of car costs if possible. This may be hard if you’re gifting it as a present, but if you are, be ready to take on the costs if your kid or spouse doesn’t think they can keep up with maintenance costs. It’s not always fair to force them into a job or second job if that’s what it takes to maintain the car, especially if they weren’t expecting a car from you in the first place.
Costs to consider are registration fees, insurance coverage, maintenance fees, and gas to get around.
And make sure that your loved one is aware of these costs and has a chance to voice their thoughts on whether or not they think it’s a good idea to assume responsibility for all of the above considerations.
Should I let them borrow the car instead?
If ongoing costs are going to be a problem, and you are feeling generous. You can always let your family member borrow your car.
If you want to let a family member drive your car legally, there are a few things you should do to ensure that they are covered by your car insurance and that you are complying with any applicable laws and regulations. Here are some steps you can take:
- Add them to your insurance policy: If your family member is going to be driving your car regularly, you should add them to your car insurance policy as a named driver. This will ensure that they are covered by your insurance in case of an accident. Be aware that adding another driver to your policy may increase your premiums.
- Make sure they have a valid driver’s license: Before letting your family member drive your car, make sure they have a valid driver’s license that is appropriate for the type of vehicle you own. For example, if you have a manual transmission car, they should have a driver’s license that allows them to drive a manual transmission vehicle.
- Set guidelines and boundaries: Before letting your family member drive your car, it’s a good idea to set some guidelines and boundaries. For example, you may want to establish when and for what purposes they can use the car, as well as any restrictions on who else can drive the car.
- Consider a written agreement: To avoid any confusion or disputes down the line, you may want to consider drafting a written agreement that outlines the terms of your family member’s use of your car. This can help clarify expectations and responsibilities and can be especially helpful if your family member will be driving your car for an extended period of time.
- Keep your registration and insurance documents up to date: Make sure your car’s registration and insurance documents are up to date and that you have the appropriate documentation in the car, such as proof of insurance and registration. This can help ensure that your family member is legally allowed to drive the car and that you are in compliance with any applicable laws and regulations.
There are a lot of factors that go into gifting a car properly to a loved one in your family. Always make sure that you’re communicating as much as you can about the responsibility and costs, both foreseen and unforeseen, that come along with owning a car.
And make sure that you gift it correctly so that both you and your loved one can avoid paying any hefty and unnecessary fees if at all possible, and to further eliminate any unexpected costs along the way.