Maybe you have a child that is graduating from school or a relative in need of a vehicle. It might even be that you know someone who is struggling financially and you would like to gift them a car. Whatever the reason, there may come a time when you would like to gift a car to someone else. Given that the process of gifting a vehicle is much different than buying one, it’s important to know the process of how it works and also understand the tax implications of giving a car to someone else.

Make Sure the Car is Paid For

You will not be able to gift a car or transfer a title unless you own the car. Therefore, if you have an outstanding balance on your car loan, you must pay it off completely before you can give the car as a gift. Be sure you obtain a copy of this final payment from your bank or dealer’s lending department to confirm the full payment.

Consider the Recipient’s Financial Situation

Even though you are gifting a car to someone else for no financial gain, you still need to go over the terms of the arrangement with the recipient. Make sure they understand that once you give them the car, they will be responsible for other costs such as gas, insurance, and maintenance. You also want to work out who will be paying the taxes and other fees associated with transferring the title. If the recipient is unable to afford the expenses associated with owning the car, you may want to reconsider your decision.

Be Prepared to Pay the Gift Tax

While there may be no sales tax, there may be a federal gift tax involved with gifting your vehicle. The requirements differ every year, but typically a gift tax is applicable when the fair market value of the vehicle exceeds $15,000 for a single person or $30,000 for a married couple. The gift tax can be anywhere between 18-40%.

Write Up a Bill of Sale

Without a formal bill of sale, there is no proof that someone else owns the car and you may still be liable. You can avoid any misunderstandings by writing up a bill of sale that includes the following information:

  • Make and model of the vehicle
  • Purchase price of the vehicle
  • VIN
  • Odometer reading
  • Your signature and the signature of the giftee

Transfer the Vehicle Title

You must transfer the vehicle title to officially release ownership of the vehicle. The easiest way to transfer the title is to go to your local DMV, fill out the necessary paperwork, and pay a transfer fee. At this time you will list the price of the car as gift. Since vehicle transfer laws and fees vary by state, you may need to familiarize yourself with this information before gifting your vehicle.

Make Sure the New Owner is Insured to Drive the Car

Now that you are ready to hand the keys over, you need to make sure the giftee is properly insured to drive the car. They will not be able to legally drive the car without insurance. If the giftee already has car insurance, they simply need to contact their insurance company to add this vehicle to their existing policy. If they do not have insurance, they will need to sign up for a new policy.