If You Inherit a Car, Do You Have to Pay Taxes?
Understand the tax implications of inheriting a car, including potential estate taxes, transfer fees, and capital gains considerations if you decide to sell.
Receiving a car as an inheritance can be both a financial benefit and a responsibility. While you may not have to pay for the vehicle itself, there are potential tax implications and fees. Understanding these costs is important to avoid surprises.
Several factors determine whether taxes apply, including estate value, state laws, and what you do with the car after inheriting it. Knowing what to expect can help you plan accordingly and meet all legal requirements.
Estate Tax Considerations
The federal estate tax applies only to estates exceeding $13.61 million in 2024, meaning most estates are exempt. However, some states impose their own estate taxes with lower exemption limits. For example, Oregon and Massachusetts tax estates valued above $1 million.
If an estate is large enough to be taxed, the executor pays the estate tax before distributing assets. This means that if you inherit a car, any estate tax liability has already been settled. Federal estate tax rates range from 18% to 40%, while some states impose additional taxes.
Inheritance or Gift Taxes
Whether you owe taxes on an inherited car depends on state laws. Unlike estate taxes, which the estate pays, inheritance taxes are levied on the beneficiary. Only a few states impose this tax, including Iowa, Kentucky, Maryland, Nebraska, New Jersey, and Pennsylvania. Tax rates range from 1% to 18%, with immediate family members often receiving exemptions.
If the car was gifted before the owner’s passing, federal gift tax rules may apply. In 2024, the IRS allows an annual exclusion of $18,000 per recipient. If the car’s value exceeds this, the giver—not the recipient—must report it on a gift tax return. However, actual taxes only apply if the donor’s lifetime gifts exceed $13.61 million.
Title Transfer and Registration Fees
Taking legal ownership of an inherited car requires updating the title and registration. Fees vary by state and may be based on the car’s value, weight, or location. Some states charge flat fees, while others use a percentage of the vehicle’s market price. For example, California charges a $15 title transfer fee, while Florida’s fee is $75.25 for an out-of-state transfer. Additional costs may apply if registration is expired or new license plates are needed.
Some states offer tax exemptions for inherited vehicles. In Texas, heirs may qualify for an exemption from the 6.25% motor vehicle sales tax with an Affidavit of Heirship. Michigan allows a title transfer without sales tax for inherited cars. However, states like Arizona and Georgia do not offer exemptions, meaning standard fees apply.
Capital Gains if the Car Is Sold
Selling an inherited car can have tax consequences depending on its value at the time of inheritance. The IRS uses the “stepped-up basis,” meaning the car’s fair market value at the time of the original owner’s death is used to determine taxable gains. If the car sells for more than this value, the difference is considered a capital gain. If it sells for less, no deduction is allowed for the loss.
Inherited assets are always classified as long-term holdings, meaning gains are taxed at long-term capital gains rates of 0%, 15%, or 20%, depending on total taxable income. In 2024, single filers with taxable income under $47,025 owe no capital gains tax, while those earning between $47,026 and $518,900 pay 15%. Higher-income individuals face the 20% rate, with an additional 3.8% tax for those exceeding $200,000 ($250,000 for married couples filing jointly).
Documentation and Recordkeeping
Proper documentation is necessary when inheriting a vehicle to avoid legal complications. Required documents typically include the original title, a copy of the death certificate, and probate court documents proving legal transfer. If the estate was handled through a will, a certified copy may be needed. Some states require an Affidavit of Heirship if the estate did not go through probate.
Maintaining records of expenses related to the vehicle is also important, especially if you plan to sell it. Keeping documentation of the car’s fair market value at the time of inheritance helps determine potential capital gains tax liability. If the vehicle requires repairs before being sold, receipts for these costs should be retained. Additionally, if the car is gifted or donated, proper documentation is necessary to claim any potential tax deductions. Ensuring all paperwork is accurate can prevent issues with state agencies or the IRS.