What Are the Tax Rules for a Classic Car?

Owning a classic car involves distinct tax rules that differ from a standard vehicle. These tax considerations apply throughout the ownership lifecycle, from the initial purchase and annual taxes to the eventual sale or donation.

Defining a Classic Car for Tax Purposes

The definition of a “classic car” for tax purposes depends on the governing body. State Departments of Motor Vehicles (DMVs) define classic or antique vehicles based on age, often 20 to 25 years, to issue special license plates. These state definitions can come with usage restrictions, such as limiting the vehicle to shows and parades.

Local tax assessors may use their own criteria to determine how a car is valued for annual personal property taxes. The Internal Revenue Service (IRS) does not define a classic car by age but views it as a “collectible.” This IRS classification is relevant when the car is sold, as it dictates the capital gains tax rate.

Tax Implications at Purchase

When acquiring a classic car, the main tax is the state and local sales tax, calculated on the purchase price. The buyer is responsible for paying this tax when registering the car and transferring the title. This applies whether the car is bought from a dealer or a private individual.

A distinction exists between sales tax and use tax. Sales tax applies to in-state purchases, while a use tax is levied on vehicles bought out-of-state but registered in the buyer’s home state. The rates are the same, preventing tax avoidance. In a private sale, the buyer must report the purchase price and pay the tax to the state.

Annual Tax Obligations

Not all states levy a personal property tax, but where they do, it is a recurring tax for classic car owners. This annual tax is imposed by local governments based on the vehicle’s assessed value. Owners must report their vehicles to the local tax assessor, who determines the value and calculates the tax.

Assessment methods for a classic car’s value vary by jurisdiction. Some localities use standard valuation guides, while others may have special provisions for antique vehicles. For example, some may cap the assessed value of a registered antique car at a low amount, such as $500, to reduce the tax liability.

Tax Consequences of Selling a Classic Car

Selling a classic car for a profit triggers federal income tax. The IRS classifies a classic car as a “collectible,” a sub-category of capital assets. If the car was owned for more than one year, the profit is considered a long-term capital gain and is subject to a maximum federal tax rate of 28%. This rate is higher than the rates for most other long-term capital gains.

The taxable gain is calculated by first determining the car’s “cost basis.” The cost basis includes the original purchase price plus the cost of major improvements and restoration projects. Routine maintenance and repairs are not included in the cost basis.

For example, if a car was purchased for $30,000 and the owner spent $20,000 on restoration, the cost basis is $50,000. If the car sells for $95,000, the taxable capital gain is $45,000. Owners must maintain detailed records of the initial purchase and all capital improvements to substantiate the cost basis.

Charitable Contributions of Classic Cars

Donating a classic car to a qualified charity can result in a tax deduction, which is limited to the gross proceeds the charity receives from selling the vehicle. To claim a deduction over $500, the donor must receive Form 1098-C from the charity. This form reports the car’s exact sale price and must be attached to the donor’s tax return.

Exceptions may allow the donor to deduct the car’s full fair market value. This is possible if the charity uses the vehicle for its operations, makes a material improvement to it before the sale, or gives it to a needy individual at a price below market value. The charity will note these circumstances on Form 1098-C, permitting the higher deduction.