How do you get the best deal for your old car when you buy another car? Most people will tell you the best deal is to sell your old car on your own instead of trading it in to the dealership. I disagree. I think most people can save time and money by trading their car in – if they are able to get a fair price for their car.
Tax benefits of trading in your car
Why? Because there are tax benefits to trading in your old car. In most states, when you trade-in your car when purchasing another vehicle, you are only required to pay sales tax on the difference between the trade-in value and the price of the new car.
- New car purchase price: $30,000
- Taxes paid (7% of $30,000): $2,100
- Used car sold by owner: $16,000
- Total cost of new car: $32,100 – $16,000 = $16,100
With Trade-in: (Remember, in this example, the price of the trade-in is deducted from the price of the new car for tax purposes).
- New car purchase price – $30,000
- Trade-in Value: $15,000
- Taxes Paid (7% of $15,000): $1,050
- Total cost of new car: $31,050 – 15,000 = $16,050
I admit, these numbers work perfectly, but you will find that even with lower numbers, the final result is very close. For example, when you buy a $25,000 car and have the option of selling your car yourself for $11,000 or trading it in for $10,000, selling the car on your own results in an extra $300 after tax benefits are considered. That $300 represents real money in your pocket; but I still think trading your car in can be a better deal. Here is why:
Trading in your car can save you time and money. When you trade-in your car, the deal happens that day. You do not have to place advertisements, locate a buyer, arrange test drives, wait for the buyer to line up financing, or deal with any other issues, including future liability. At the dealership you sign a few papers, and the car is no longer your responsibility.
When you sell the car yourself, there are no guarantees. You are responsible for listing the car for sale (which can cost money), finding a buyer, arranging a test drive, dealing with the buyer’s financing, determining a safe and secure method of payment, and handling other paperwork. Did I mention that it may take you several weeks to do everything?
In addition to the hassles of listing the car and finding a buyer, in some states the seller can be held liable for problems that occur shortly after the sale. Trading your car in negates those legal liabilities.
Is trading in your car always better? No. Sometimes the dealership will not give you a fair offer, and sometimes you can sell your car quickly and easily to a family member, friend, or coworker and not have to worry about the issues listed above. The tax benefits are also less substantial in states with low sales tax.
But, trading in your car is all about convenience. In the second example above, the net difference was only $300 savings for selling the car yourself. When you add up the time and costs involved, that extra $300 may not be worth the hassle.
The last time I bought a new car, I traded my old car in. I estimate I could have made an additional $1,000 on the sale price vs. trade-in price, but after the tax considerations, the total difference would have been in the ballpark of $500. I had other reasons to trade-in as well – I lived in a small town at the time, and actually drove several hours to a large city where I saved well over $1,000 on the price of my new car. That savings more than made up for the difference of trading my old car in.
The next time you buy a car, investigate how much you can get by selling your car or trading it in. You might just find out that trading your old car in is actually the best deal.
photo credit: magstefan.