If you have a vehicle that you no longer need and want to help your daughter out, you might consider letting her buy it for the low price of $1. However, the way that states charge sales tax on vehicles can potentially leave your daughter with a hefty tax bill when the vehicle transfer occurs. As an alternative, you might consider gifting the car since this bypasses the sales tax and involves a similar process for transferring the vehicle. Before you proceed with either option, you should learn about the procedures, benefits and considerations for gifting a car vs. selling it for $1 to make an informed choice.
Selling a Car for One Dollar
When you sell the car to your daughter for any amount, you have to follow a process of producing documentation and following the motor vehicle department's procedures for transferring the car. Before you can proceed at all, you need to fully pay off any remaining loan balance. This involves contacting your car's lender for a payoff amount and waiting for the payment to post. After you pay off any loan and have the lender removed from the car's title, you'll want to make sure the title is clear of any other liens or problems.
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Once you've completed these steps, you can proceed with the $1 vehicle sale by drafting a bill of sale. This will include the car's sale price, make, model, mileage, year and other car details alongside the contact information and signatures for both you and your daughter. After you've completed the transaction, your daughter can visit your local department of motor vehicles in person or check their website to see if they offer online title transfer. She'll need the bill of sale, original title, certificate of title application, identification, proof of insurance and money for the title transfer fees.
During the transfer of ownership process, you won't have to pay any capital gains tax since you're not likely selling the car for a profit at $1. However, your daughter will have to pay whatever rate of sales tax your state charges on used vehicles when she goes to transfer the title. Unfortunately, this tax usually applies to the car's fair market value rather than the $1 you charged her.
Gifting the Car Instead
If you want to give your daughter the car and not have to worry about her needing to potentially pay a lot of sales tax, you could gift it to her as an alternative. This comes with the same conditions such as needing to have the car paid off and follow your state's requirements for transferring the title. You'll also usually make a bill of sale or other document noting the gift. Your daughter will also need to show the motor vehicle department that she will have insurance on the car.
However, you should know that you may have to pay a gift tax depending on how much the car is worth. As of publication, you won't pay any gift tax or file a gift tax return as long as the car's market value is $15,000 or less. If your car's value goes over that amount, you'll be liable for a tax on the difference between the market value and the annual exclusion. This rate ranges between 18 percent and 40 percent in 2020.
The good news is that while you'll need to do a gift tax return when you file your taxes, you probably won't actually have to pay the tax owed at that time. This is because the Internal Revenue Service has a lifetime exclusion – $11.58 million for 2020 – and it simply lowers the remaining amount by the excess value of the car gifted during the year. You do have the option to go ahead and pay the gift tax, though.
Gifting a Car vs Selling for One Dollar
As you've seen, you'll need to take similar steps whether you're gifting a car vs. selling for $1. However, gifting your car to your daughter can work out better financially since it avoids the vehicle sales tax. However, do be aware of any gift tax for which you may be responsible. If you do proceed with selling it to your daughter, first check your state's rules for sales tax on used vehicles so that your daughter has an idea of how much money she'll need to pay when she goes to transfer ownership.