Tax when you sell a junk car: what the IRS and the states say

That's the short version. Below is what each rule says, where Texas fits, and the paperwork that does more to protect you after a junk sale than any tax form.

Income tax: a loss on your own car stays yours

The IRS treats a car you hold for personal use as a capital asset. Its rule for selling one runs in one direction: "a loss from selling it is not deductible" (IRS Publication 544). The same publication gives the only exception: a casualty or theft loss.

Most junk cars land here. You bought the car years ago, it wore out or broke, and now it sells for a small part of what it cost. On paper that's a loss, and for a personal car the IRS gives no deduction for it. There's nothing to subtract and no tax saving to chase.

The exception is narrow. The IRS carves out a casualty or theft loss. If that might fit your car, take the question to a tax professional with your insurance papers in hand.

When the sale brings in more than you paid

If you sell a car for more than you paid, the IRS answer is the other half of the same rule: gain from selling personal-use property is a capital gain.

You report it on Form 8949 and Schedule D (Form 1040), as applicable (IRS Publication 544). The Form 8949 instructions list the sale of capital assets held for personal use among the transactions the form covers.

To know which side of the line you're on, you need two numbers: what you paid for the car and what you sold it for. Dig out the old bill of sale or purchase papers before you sell, and keep a copy of the new one afterward.

Sales tax: a worked example from Texas

Sales tax on a used car sale is a separate question from income tax. In Texas, the Comptroller says plainly that "the buyer of a motor vehicle in Texas owes motor vehicle sales tax" (Texas Comptroller). Here's how it works there:

• Rate. 6.25 percent of what the car sold for, less any trade-in credit.
• Who pays, and when. A private-party buyer pays it to the county tax assessor-collector within 30 calendar days of the purchase.
• What it's figured on. For a private-party used-vehicle sale, the tax is based on the standard presumptive value, not necessarily the price paid.

That last point matters to the buyer more than to you. A Texas buyer can owe tax on a value higher than the junk price written on the bill of sale. The Comptroller puts that tax on the buyer, who pays it to the county tax assessor-collector.

We confirmed this rule from an official page for Texas only. Other states set their own sales tax rules, and we haven't checked them, so look at your state's revenue agency before assuming Texas applies to you.

The paperwork that ends your responsibility

Tax is rarely what catches junk-car sellers. What catches them is still being listed as the owner after the car is gone. A ticket, a toll or a towing bill can come back to the name on the record. Many states give sellers a way to close that out, and where a deadline is set it runs from 5 to 30 days.

Here is what each state's sources say a seller files or does after the sale:

After you sell goes through the plates and these notices step by step.

What to keep after the car leaves

One folder covers both the tax side and the liability side:

• what you paid for the car, if you can find it
• the bill of sale, with the date and price
• a copy of the signed-over title, front and back
• the confirmation from your state's sale notice or plate return
• insurance papers, if the car was wrecked, burned, flooded or stolen

Fix it or sell it: taxes don't decide this one

Since the IRS gives no deduction for a personal-car loss, there's no tax angle that favors repairing over selling or the other way around. The choice comes down to two numbers: the repair estimate and what the car brings as it is. If you're weighing a part-out against one sale, this comparison lays out the work involved.

If an insurer has already totaled the car, the title brand changes what it can be sold as; the salvage title guide covers that.

Selling it to us

We buy whole non-running and junk cars. You sell the whole car as it sits, and pickup is free anywhere in the US. File the sale paperwork in the folder above.

Want to ask something first? Call (877) 421-6008.