Trade in car v sell to Carmax math

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Topic Author
jw2s
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Trade in car v sell to Carmax math

Post by jw2s »

Good evening,

I can't think of a better way to spend a Friday night than to ask with humility a seemingly simple math problem. Please join me.

I'm buying a new car. Family has outgrown the current car. I have a 3yr old car to trade in. It is paid off.

New Car:
Retail $48,154
Accessories $279
Sale Price $48,433
Document fee $394
Registration fee $184.87
TAX $2,905.98

OTD Price $51,917.45

Dealer offer for trade in is $33,000. This will save me $1,980 in tax

CarMax offer for trade in is $37,000.

Is selling to CarMax the better deal?
I paid $36000 OTD for current car. Do I pay capital gains on the OTD price I paid for it? Bought OTD $36,000. Sold for $37,000. Pay tax on $1,000 dollars? What would the rate be?

Since Carmax will pay me $4,000 more, and that outweighs the $1,980 tax savings, is it better?
So, 15% of 1000 is $150. It seems clear that I should sell to Carmax for $4000 more and pay the $150 capital gains, correct?

First timer selling a used car for gains...
SlowMovingInvestor
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Re: Trade in car v sell to Carmax math

Post by SlowMovingInvestor »

You can ask the dealer if they'll match or at least come closer to the CarMax figure.
Jack FFR1846
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Re: Trade in car v sell to Carmax math

Post by Jack FFR1846 »

But did you have a gain?

Did you pay for:
gas
oil
inspection sticker
any maintenance
tires
registration
taxes

I really doubt you spent less than $150 on the car, thus, I see no gain.

As mentioned, ask the dealer to match the car max price. If you're still concerned with the gain, have the dealer pay you $4k less for your trade but charge you $4k less for the car you're buying. That's completely legit. The only thing the dealer cares about is the difference you're paying.
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psteinx
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Re: Trade in car v sell to Carmax math

Post by psteinx »

I haven't researched this, but contra Jack FFR, I doubt you can add ordinary usage and maintenance costs to your basis.

I think in the more common case of a HOUSE you buy and sell for a gain (outside of the $250K exclusion or whatever), you can add actual improvements to your basis (putting a garage on a house that didn't have one), but not maintenance (painting your house or whatever).

But do your own research.

===

Back to the car trade-in. In some states (like mine, Missouri), you can get a sales tax credit even when you don't do a trade in. i.e. Buy car from dealer A, sell different car to private party, or dealer B, within a given time window, and deduct the sales price of different car from newly bought car for sales tax purposes.
AussieDad
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Re: Trade in car v sell to Carmax math

Post by AussieDad »

I've never heard of an individual paying capital gains on a used car sale. How would the IRS even know? Does Carmax report the sale? I sold my truck to Carmax last year for 6k more than I paid for it in 2020. It never even crossed my mind I might be taxed on the gain.
Topic Author
jw2s
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Re: Trade in car v sell to Carmax math

Post by jw2s »

AussieDad wrote: Sat Jan 22, 2022 1:48 am I've never heard of an individual paying capital gains on a used car sale. How would the IRS even know? Does Carmax report the sale? I sold my truck to Carmax last year for 6k more than I paid for it in 2020. It never even crossed my mind I might be taxed on the gain.
It never crossed my mind either until I read it somewhere on here. I guess if the IRS really wanted to know where a lump $37K came from in my bank account...
Jack FFR1846 wrote: Fri Jan 21, 2022 8:39 pm But did you have a gain?

Did you pay for:
gas
oil
inspection sticker
any maintenance
tires
registration
taxes

I really doubt you spent less than $150 on the car, thus, I see no gain.

As mentioned, ask the dealer to match the car max price. If you're still concerned with the gain, have the dealer pay you $4k less for your trade but charge you $4k less for the car you're buying. That's completely legit. The only thing the dealer cares about is the difference you're paying.
I'll be paying the same amount to the dealer no matter what. MSRP or bust nowadays it seems. They'll sell it to someone tomorrow if I don't pay the agreed upon price. I will ask them to match the trade in value of Carmax. If they don't, obviously I'm going to sell to Carmax instead of them and use the proceeds to buy the new car.

Yes, I did pay for gas, inspection/emission, taxes when I bought it etc...
I didn't know this counted against any capital gains(which I calculate to be $1,000 and a capital gains tax of $150)
othermike27
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Re: Trade in car v sell to Carmax math

Post by othermike27 »

Seems to me that no one but you will have all the historical data from which a capital gain could be calculated: original purchase price and sale price of old car.
Trism
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Re: Trade in car v sell to Carmax math

Post by Trism »

I've lost money on every car I've owned.

Have I missed the boat on deducting capital losses?

Not a serious question. :)
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Stinky
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Re: Trade in car v sell to Carmax math

Post by Stinky »

Sell to CarMax. Pocket the excess value over trade in. Treat yourself to a nice dinner.

Better yet, at least explore selling to an online outfit like Carvana. When my family sold cars a couple of years ago, Carvana beat CarMax, and the experience was very positive. Don’t know if Carvana continues to be so aggressive in buying cars, but it can’t hurt to ask.
Retired life insurance company financial executive who sincerely believes that ”It’s a GREAT day to be alive!”
bob60014
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Re: Trade in car v sell to Carmax math

Post by bob60014 »

On the Carvana website they help explain the tax issue.

https://blog.carvana.com/2020/03/what-t ... a-vehicle/
carolinaman
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Re: Trade in car v sell to Carmax math

Post by carolinaman »

I have had dealers match Carmax price on trade ins. My impression is that Carmax offers are very credible to dealers. See what the dealer will do.
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steve r
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Re: Trade in car v sell to Carmax math

Post by steve r »

Taxes are an issue in CT. That is, you save on sales tax by trading in with the dealer your buy from (unlike MO). Ask the dealer you are buying from.

My gut says "try" this.

Search for your new car you want nationwide on CarMax. It may cost more than dealer or may cost less. (include delivery fees in your analysis).
"Owning the stock market over the long term is a winner's game. Attempting to beat the market is a loser's game. ..Don't look for the needle in the haystack. Just buy the haystack." Jack Bogle
SlowMovingInvestor
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Re: Trade in car v sell to Carmax math

Post by SlowMovingInvestor »

AussieDad wrote: Sat Jan 22, 2022 1:48 am I've never heard of an individual paying capital gains on a used car sale. How would the IRS even know? Does Carmax report the sale?
Taxation doesn't depend on whether the IRS knows about the income or not.

Historically it would be very uncommon for used cars (excluding collectibles) to be sold for a gain, so you would likely not have heard about it.
Last edited by SlowMovingInvestor on Sat Jan 22, 2022 8:44 am, edited 1 time in total.
SlowMovingInvestor
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Re: Trade in car v sell to Carmax math

Post by SlowMovingInvestor »

jw2s wrote: Sat Jan 22, 2022 4:55 am I will ask them to match the trade in value of Carmax. If they don't, obviously I'm going to sell to Carmax instead of them and use the proceeds to buy the new car.

Yes, I did pay for gas, inspection/emission, taxes when I bought it etc...
I didn't know this counted against any capital gains(which I calculate to be $1,000 and a capital gains tax of $150)
They don't have to exactly match the trade in value, just enough to compensate for the tax difference. Also, a little less hassle selling to the dealer since you can avoid going to a (possibly far away) Carmax location

I'm not a tax expert, but I don't see how you can add gas or regular maintenance etc. to the basis. You should be able to add the tax and fees you paid when buying. And you should be able to add any upgrades (not replacements) you did. And any prep work/maintenance you did after deciding to sell the car.

I'm unsure whether you can add any interest on any car loan you might have paid. For houses, you can't add that, BUT you get a deduction for mortgage interest every year, so you've already claimed a deduction.
Topic Author
jw2s
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Re: Trade in car v sell to Carmax math

Post by jw2s »

steve r wrote: Sat Jan 22, 2022 8:31 am Taxes are an issue in CT. That is, you save on sales tax by trading in with the dealer your buy from (unlike MO). Ask the dealer you are buying from.
This is the question:

Trade in for $33K which would save me $1,980 in taxes
Or
Sell to carmax for $37k, realize a $1,000 LTCG, and owe $150 in taxes next year?

This seems to be a new thing-used car sales now becoming capital gains!
Topic Author
jw2s
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Joined: Mon Nov 06, 2017 11:32 am

Re: Trade in car v sell to Carmax math

Post by jw2s »

SlowMovingInvestor wrote: Sat Jan 22, 2022 8:43 am
jw2s wrote: Sat Jan 22, 2022 4:55 am I will ask them to match the trade in value of Carmax. If they don't, obviously I'm going to sell to Carmax instead of them and use the proceeds to buy the new car.

Yes, I did pay for gas, inspection/emission, taxes when I bought it etc...
I didn't know this counted against any capital gains(which I calculate to be $1,000 and a capital gains tax of $150)
They don't have to exactly match the trade in value, just enough to compensate for the tax difference. Also, a little less hassle selling to the dealer since you can avoid going to a (possibly far away) Carmax location
So, if they offer me $35,000 for the trade in and save me $2,000 in taxes, is that the same as selling to Carmax for $37,000?
tvubpwcisla
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Re: Trade in car v sell to Carmax math

Post by tvubpwcisla »

I think you are over thinking it. I would sell to CARMAX or CARVANA and be done with it. The dealer will get you no matter what.
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steve r
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Location: Connecticut

Re: Trade in car v sell to Carmax math

Post by steve r »

jw2s wrote: Sat Jan 22, 2022 9:55 am
steve r wrote: Sat Jan 22, 2022 8:31 am Taxes are an issue in CT. That is, you save on sales tax by trading in with the dealer your buy from (unlike MO). Ask the dealer you are buying from.
This is the question:

Trade in for $33K which would save me $1,980 in taxes
Or
Sell to carmax for $37k, realize a $1,000 LTCG, and owe $150 in taxes next year?

This seems to be a new thing-used car sales now becoming capital gains!
I am NOT a tax expert. But to be clear. The tax thing I am talking about is sales tax. If you trade in a car in Connecticut, the trade in value is deducted from the new car price to determine sales tax. If you sell the car elsewhere (on your own) you can subtract that value. There are some new limits on this.

Base on what you wrote. To save $1980 in taxes, I suspect you are able to deduct the trade in value from your car cost in your state as well (with a 5 to 6 percent sales tax rate).

This is why you may want to see if there is anything equivalent at CarMax. Get the max trade, best car deal, and sales tax deduction.

I was NOT talking about LTCG. I do not think you need to claim this. But I do not know.
"Owning the stock market over the long term is a winner's game. Attempting to beat the market is a loser's game. ..Don't look for the needle in the haystack. Just buy the haystack." Jack Bogle
gac1979
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Re: Trade in car v sell to Carmax math

Post by gac1979 »

First things first. Get the dealer to match Carmax. Remember the dealer definitely wants the used car. Selling used cars is the dealer’s second most profitable area behind their service department.
LookinAround
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Re: Trade in car v sell to Carmax math

Post by LookinAround »

USED CAR SALES and TAXES

I'm not a tax expert but my understanding
  • IRS
    Yes. Cars are considered "Personal Use Property". If you sell a car for more than it's adjusted cost then, technically, the IRS says you should declare it on Schedule D and be taxed. However, if you have a loss you can't declare it because it's Personal Use Property. Personal use property includes items that you do not use for business purposes and did not acquire for investment purposes. For example, your car, home, coin and stamp collection and jewelry.
    • Adjusted cost = Price you paid + Cost of permanent improvements (like a new stereo). Maintenance costs (such as new tires) and repairs aren't improvements
    • I'm not telling you what to do but, in practice, unlikely the IRS would know of any gain
    • What to know about taxes when you sell a vehicle
  • STATE
    • Maybe. Some states tax private car sales (e.g. Illinois taxes amounts over $10,000) so double check your state
Topic Author
jw2s
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Re: Trade in car v sell to Carmax math

Post by jw2s »

Thanks for all the help everyone!

The dealer matched carmax. BTW, carvana was $10(TEN) thousand lower so be sure to search all of them if selling your car.

Now I don't have to deal with that pesky LTCG for a used car!
jlw35
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Re: Trade in car v sell to Carmax math

Post by jlw35 »

Bought a new Toyota Dec of last year.
Carmax was offering 32,500 for my car outright, showed it to the dealer and got an additional $500.
New car was MSRP, no negotiating so to me it was easy, plus the dealer let me keep the car until my new one was built.
helloeveryone
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Re: Trade in car v sell to Carmax math

Post by helloeveryone »

jw2s wrote: Sat Jan 22, 2022 9:55 am
steve r wrote: Sat Jan 22, 2022 8:31 am Taxes are an issue in CT. That is, you save on sales tax by trading in with the dealer your buy from (unlike MO). Ask the dealer you are buying from.
This is the question:

Trade in for $33K which would save me $1,980 in taxes
Or
Sell to carmax for $37k, realize a $1,000 LTCG, and owe $150 in taxes next year?

This seems to be a new thing-used car sales now becoming capital gains!
Consider taking the carmax offer to dealer and see if they match it as someone noted above. Pre pandemic I did this
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