Gifting a Car vs. Selling It for $1: Pros & Cons Explained in 2026
Summary:
Before you decide whether to gift a car or sell it for $1, it’s important to carefully consider the pros and cons of each. Read on to understand the legal steps, potential tax implications, and financial responsibilities associated with gifting a vehicle.
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Gifting a car vs. selling it for $1
The main difference between gifting a car and selling it for $1 lies in tax implications. Gifting typically incurs a potential gift tax, with some states requiring a notarized gift affidavit. Selling for $1 may avoid gift tax but could trigger suspicion from the DMV or IRS about undervaluing the transaction.
While TV advertising suggests otherwise, gifting a brand-new vehicle over the holidays is less common than you may think. That said, with new vehicle prices averaging $34,876 (according to a study by AAA), gifting a used car may be a smarter financial move.
It’s important to note that in some states if you decide to sell a car for a dollar as opposed to gifting it, the recipient of the vehicle may be on the hook to pay sales tax on the fair market value of the car, not the purchase price.
Here’s a quick summary of the pros and cons of each option.
Pros and cons of selling a car $1
Pros and cons of giving the car as a gift
Is a car the best gift?
While giving someone a car is generous, it isn’t always right for the recipient’s lifestyle or wallet. It’s important to remember that gas, insurance, and maintenance costs add up, averaging over $12,000 per year in 2023, according to AAA. Consider if the new owner can afford consistent upkeep for the vehicle, if they have a spot to store it, and, most importantly, if they want a vehicle in the first place.
Do you own the vehicle?
In order to gift a car, you need to own it outright. That means you must have completely paid off any auto loan you took out to purchase it. If you still owe money to the lender, they hold on to the title until the car is paid off. That means you’ll need to finish repaying the loan and take possession of the title before you’re legally allowed to gift it to someone else.
Important
If you’re buying the vehicle just to gift it, you’ll need proof of insurance to show the dealership. In this case, you can temporarily add the car to your policy until the gift recipient secures their own car insurance on the vehicle.
How to give a car as a gift
If you’re adamant about gifting someone a car, here are the steps you’ll need to take:
Write up a bill of sale
Legal requirements vary by state, but if you live in a state where bills of sale are enforced, it’s best to get that in order first. The bill of sale is legal documentation that proves that the vehicle was sold or gifted. In this case, it will outline the ownership details of the person you’re giving the car to.
The following information is commonly required, but you’ll want to check with your state’s Department of Motor Vehicles for further guidance:
- Vehicle identification number (VIN)
- Make, model, color, and year of the car
- Odometer reading at the time of “sale”
- Payment details (in this case, use “gift” as the sale amount)
- Terms and conditions of the transaction
- Buyer and seller names and contact information
- Signatures from the buyer and seller
Transfer the title
The title serves as proof of ownership, so once you gift the vehicle, you need to transfer the title to the new owner’s name. This process varies by state, so visit your local DMV or Secretary of State’s website for specifics. Typically, you’ll need the date of sale, odometer reading, and buyer information. The title should also reflect the car’s purchase price, so simply write in “gift.”
Complete an affidavit of motor vehicle gift transfer form
Along with the title documentation, some states require additional proof of ownership. By filling out a gift affidavit, you give formal legal ownership to the new owner. Again, the specifics of this documentation vary by state, but it will require certain information about you and the person who receives the car as a gift.
Fill out your tax forms
The final step in the gift-giving process is to address any tax implications. You can find your state’s laws by conducting an internet search for your state plus “gifting a car.” At the national level, the IRS requires disclosure of gifts above a certain amount due to gift tax rules.
You’ll have to file a gift tax return if the vehicle’s fair market value brings the total value of gifts you’ve given the recipient in the tax year to above $17,000. Still, even if the gifted car is worth more than $17,000, you likely won’t need to pay taxes on it. The amount above the $17,000 threshold counts against a lifetime exclusion of $12.92 million, meaning you’ll only need to pay taxes if your lifetime total exceeds that amount.
Donating a car to charity
Another option to make a difference with your old car is to gift it to a charity. Simply donate the car to a charity of your choice, such as Habitat for Humanity or Kars4Kids, which will then sell it and use the proceeds to further their mission. Donating a car to charity can also give you a nice deduction on your tax returns, says Logan Allec, CPA and owner of tax relief company Choice Tax Relief.
According to Habitat for Humanity, “Once your vehicle is sold, the selling price determines the amount of your donation. If your vehicle sells for more than $500, you may deduct the full selling price. If your vehicle sells for $500 or less, you can deduct the ‘fair market value’ of your vehicle, up to $500.”
Allec also points out that there are no tax benefits if you’re gifting the car to a friend or family member: “If the car is gifted to, say, a relative, the donor would not be eligible for any deduction for the gift, and they may have to file a gift tax return depending on the fair market value of the car on the date it was transferred to the recipient.”
FAQ
What costs should the recipient be aware of after receiving a gifted car?
The recipient needs to consider ongoing costs, including gas, insurance, and maintenance, which can average over $12,000 per year in 2022, according to AAA.
Is it necessary to consult a tax professional when gifting a car?
While not mandatory, consulting a tax professional is a good way to ensure proper adherence to legal procedures and tax regulations associated with gifting a car. Tax professionals can provide personalized guidance based on your state and specific situation.
What is the significance of writing “gift” in the purchase price section of the title?
Writing “gift” in the purchase price section of the title is important because it indicates that the transaction is a gift, not a sale. This helps in determining the correct tax implications and avoids confusion regarding the vehicle’s actual sale value.
Are there specific legal requirements for gifting a car that vary by state?
Yes, legal requirements for gifting a car vary by state. It’s essential to check with your state’s Department of Motor Vehicles or relevant authorities to understand and comply with specific regulations in your jurisdiction.
Key takeaways
- Gifting a car, as opposed to selling it for $1, can save the recipient from having to pay sales tax based on the car’s fair market value.
- Before gifting a car, consider the recipient’s ability to afford ongoing costs, such as gas, insurance, and maintenance.
- In order to gift a car, you’ll need to transfer the vehicle title and create a bill of sale.
- If required by your state, you may also need to complete an affidavit of motor vehicle gift transfer form.
- If you’re considering gifting a car, consult a tax professional to ensure adherence to legal requirements.
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