Pay taxes on vehicle sale to child?

[BigZ]

What is the name of your state? Texas

If I "sell" my car to my son (24 years old), will he need to pay taxes on the sales price ($28,000)? I am not simply giving him the car and changing the title into his name. He is actually paying me for the car.

If he does have to pay taxes, is there any other way to do this transaction?

Could I "gift" him the car and then he just gives me the money in a separate transaction? However, if we did that, would the IRS see the money he gives me as income... and then I will have to pay income taxes on that $28,000?

Update: Just read somewhere that I do not have to "charge" him tax because I do not have an official business license. But, when he goes to register the vehicle in his name, the county will tax him on the price of the vehicle. This sound right?

 

[shortbus]

If you sell the car to your son for less than market value, then it's a part sale, part gift transaction. So if he pays $10K for a $28K car, there's a $10K sale and an $18K gift in the transaction.

He doesn't have to pay income tax, though if there's county/state registration fees those will presumably be assessed at full market value.

Also, if you make a gift more than $11K you potentially have gift tax issues to consider. If you make two parallel gifts, that has no income tax effects but it increases gift tax effects.

If you want to avoid the gift tax issues, structure it as an installment sale. Have your son pay you over three years at some reasonable rate of interest (say 6%). On a $28K car that's $1680 per year. Then each year he pays you 1/3 of whatever he was going to pay you now, and you 'forgive' the rest of the principal/interest payment due as a gift. That way you spread out the gift over several years and don't trigger any gift tax liability.

 

[abezon]

3 kinds of taxes at issue here: sales, gift, & income.

Sales tax: if you gift the car or sell for less than FMV, your son may be able to avoid some sales taxes (usually collected when he changes title to his name). Consult the county licensing office for details on your state & local laws. There may also be an exception for sales among family members.

Gift tax: You can gift him up to $11,000/year without having to file a gift tax return. Since he's paying you FMV, this doesn't sound like it's an issue.

Income taxes: Unless you paid less than $28k for the car, this is not an issue. You only pay income taxes on profits form sale of personal items. You cannot claim any losses on personal use items.

If you structure the sale as an installment sale, the IRS will impute interest to the contract which you'll have to report as interest income, whether you collect it or not. Assuming the IRS finds out. And cares.