A car is a kingly gift, you might think, but the huge range of great-value options and affordable financing methods is actually making it much easier than ever before. Of course, not everyone gifts a car that they have just purchased. What a lot of people actually do is to gift a car they already own, perhaps to a family member or friend.
Here’s the thing: you can’t just put a bow on the car and hand it over to somebody and make it legally theirs. There is a bit of admin and paperwork you have to do first.
Let’s not forget that a car is a pretty heft and real tangible asset. It’s not like handing someone a jar of Skittles. In today’s blog, we’ll explain the processes you need to undertake to gift a car properly and correctly in the US.
What Does “Gift” A Car Mean?
Let’s be clear for a moment on the actual legal definition of what it means to give your car to someone else as a gift. The legal definition of a gift is “a voluntary transfer of property or of a property interest from one individual to another, made gratuitously to the recipient.” So, when gifting a car, then, the car represents the property or property interest, and you’re handing it over to the recipient with no expectation of payment or other remuneration.
In the case of gifting a car, then, the current owner is handing over the legal title and ownership of the car to another family member, or possibly a close friend or neighbor. When it’s an asset like a car, there are certain implications of that.
One of the reasons that gifting a car can get complicated is that when cars are sold, there is invariably a sales tax to pay on them. To avoid this tax would be all too easy if a buyer and seller simply agreed to “exchange gifts” — one handing over $5,000 in cash and another handing over a car. Therefore, there needs to be some paperwork done to confirm the validity of the gift transaction.
Gifting a Car in the US: Step-by-Step Guide
Always research legal advice from your authorities in the state or country you live in. These are not legal or financial advice and are just some general rules you should look into, do your own research before giving your car away.
Step 1: Assess All the Financial Implications for the Recipient
Let’s start with a bit of good housekeeping before we get to the legal matters. Gifting a car is a very generous thing to do, of course, but have you taken the time to think through all of the implications of that move? Will the recipient be able to afford to fill the car with gasoline?
Will they be able to renew the insurance at the end of the first year (assuming you paid for the first year, but perhaps you didn’t)? Will they be able to cover the maintenance costs? If it’s an older car, it’s safe to assume the warranty has expired, so will that be an issue?
It’s important to think about these logistical questions before you actually start the process. As thoughtful, generous and empowering as your gift is, it could end up being a financial albatross around your family’s or the recipient’s neck.
If you’re not planning a big reveal on the day of handing the car over, then perhaps talk with the recipient first about the transaction. If you are planning a surprise, talk about it with family members but at least try to determine whether or not this will be a good move.
RELATED: How to Safely Sell Your Car
Step 2: Pay Off All Outstanding Finance on the Car
The next thing to do is to pay off any outstanding debt that there is against the car. You won’t be legally allowed to gift the car to someone else if you don’t own the car outright. Selling it is different because you can use money from the sale to clear the debt and remove liens from the car’s legal title before you transfer it to the new owner.
So, if there is remaining finance on the car, then ensure it has been cleared. If the car is more than 5 years old, it’s unlikely in most cases that there will still be debt on the car, but just in case, don’t forget that critical step.
Step 3: Look Into the Possibilities of Gift Tax
Gift tax is an area where things can start to get a bit complicated. You might have thought that by gifting the car you are doing a smart thing because you avoid any need for sales tax. The trouble is that the US also levies taxes on gifts, so you’re not quite out of the woods just yet.
The first bit of good news is that the federal gift tax in the US only applies to cars (or other gifts) worth more than $15,000, and going up to $16,000 in 2022. There is also a time element to this $15,000 limit, in that it represents the total amount of tax-free gift giving in a single year.
More good news is that this gift tax threshold of $15,000 is levied per person. Therefore, if you are married, you could give away a more valuable car jointly with your spouse since your combined limit is $30,000. The somewhat bad news is that the gift tax, if it applies, can be anywhere from 18 to 40 percent, making it even scarier than the sales tax!
The best thing to do is think about what kind of car you are gifting. In many cases, a car being gifted to another family member is older, and may only have been worth $20,000-25,000 when brand-new, now being worth well under $15,000. It’s not a common thing for people to give away fancy luxury cars or brand-new sports cars. If your car’s market value is under that threshold, you have nothing to worry about.
Do take note, however, that trying to get around a gift tax by selling the car to your recipient for $1 to avoid and paying a negligible sales tax will fail. When you’re selling a car, the sales tax is only based on the sale value if and when the sale value exceeds the market value, otherwise it’s based on the market value, so you’ll still have to pay sales tax.
Step 4: Prepare a Bill of Sale
This step may seem a little counterintuitive when we’re talking about gifting a car, but don’t let the name fool you. The bill of sale simply acts as a kind of legal proof that the car has changed hands and that you, the gifter, are no longer responsible for it.
Many people without such proof may run into trouble if the new owner gets into trouble on the road and law enforcement trace the car back to you. It does happen when people forget to prove that the transaction has taken place and/or when forgetting certain other administrative steps.
The bill of sale is very simple, and you can easily find samples online that are valid in your home state. The bill of sale needs to contain:
- The make and model of the car
- The purchase price
- Vehicle identification number
- Odometer reading at handover point
Step 5: Insure the Recipient and Transfer the Title
Now comes the really bureaucratic part, which is transferring the title over to the recipient and them registering the car in their own name. Before any of that, you’ll need to be sure that the recipient has valid insurance. Before the car can ultimately be registered, the new owner will have to have proof of valid insurance.
Once the insurance is in place, most states in the US will allow you to fill in the new owner’s details in the transfer section on the back of the vehicle title. Do check your state’s own rules, though, because some may require you to go to the DMV in person to have everything signed over and approved by an official.
If you are unsure about filling out the title — it needs the car details, and the new owner’s details — then simply bring all the documents to your local DMV service center and have someone there assist you in filling it all out.
Step 6: Cancel Your Own Insurance
With the title transferred, you can now safely cancel your own insurance on the car. If the recipient is going to have their own insurance policy, then you’ll want to be sure yours is canceled. However, you must only do that after the transfer is completed.
If you cancel your insurance while the car is still registered to you, the system will flag your vehicle as an uninsured registered vehicle still in active use on public roads, which is illegal.