Buying a Car as a Gift? Read This | Gift Tax, Co-Signing & More

Interested in giving the gift of a new (used) set of wheels to someone special this Christmas? You’re not alone! If you’re wondering what you should know before buying a car as a gift or how you can identify the perfect ride for a friend, family member, or loved one, today’s blog has you covered. 

Title Transferring, Bill of Sales, Etc. – Handling the Nitty Gritty

Gifting a large purchase, such as a car, comes with more stipulations than the average stocking stuffer. If you want to gift a car, here are some things you should know:

You need to own the car outright to give someone else legal ownership. If you’re still paying for the car, you won’t be able to transfer the title to your giftee. That’s not always an issue! For example, if you’re buying a car as a gift for your spouse, you can always keep it in your name and pay it off as they drive it (just make sure to add them as a driver on the insurance!). But if you want the giftee to own the car, you must pay it off before transferring the title. 

You’ll want a bill of sale for the giftee to sign. If they don’t sign a bill of sale indicating that they received the gift, you could be legally on the hook if something happens to it. You can use a bill of sale template specific to your state (which we recommend) or draft one yourself. If you opt for the latter, you should include the make and model of the car, the purchase price, the vehicle identification number (VIN), and odometer reading at the time of giving. 

Make sure it’s covered. You can transfer the car title to the giftee at your local DMV, but they’ll still need insurance to drive it legally. They can either add the car to an existing policy, or you can help them set up a new one. 

Do I Need to Pay a Gift Tax on a Car I Give?

Maybe. According to the IRS, you can give up to $17,000 in gifts to an individual before paying a gift tax. So, if you give someone a car worth $16,999 or less, you won’t pay a gift tax.

You can also “sell” the car to the giftee. However, they’ll need to pay the sales tax your state applies to used vehicles when you transfer the title to them. 

Generally, buying a car as a gift is the way to go. Just keep the $17,000 threshold in mind and factor in the capital gains and gift tax to your budget. If you can’t pay the car off in time to legally gift it, you can also add the giftee as a driver on the insurance policy so they can legally drive it without owning the car – but you’ll be liable for anything that happens to the car as long as you’re the legal owner.

Should I Get a Car as a Surprise Gift? 

We’ve all seen the commercials – on an idyllic Christmas day, somebody leads their loved one out to the driveway, revealing a car with a bow the giftee presumably had no idea to expect. But is buying a car as a gift really a good idea, especially if it’s a surprise?

It comes down to how confident you are the giftee will enjoy the car you buy. As we all know, cars depreciate quickly. The gifter stands to lose hundreds or thousands of dollars if the giftee doesn’t like the vehicle – for most people, that’s a huge risk. 

Selecting a Car: A Handy Guide

If you want to surprise someone with a car, try and do what you would with any other surprise gift – introduce the topic naturally into a conversation, or wait for the giftee to bring it up. If the giftee isn’t too forthcoming, you may be able to deduce what type of vehicle they’d appreciate. Consider:

• Their current car. Do they like it? If so, looking at similar vehicles that share (or improve on) their current ride’s qualities and/or features is a good idea. If not, consider what the giftee dislikes and look for something that solves those pain points.
• Their lifestyle. For example, if your giftee likes taking the family on vacations, something like a van, hatchback, or SUV that can fit the whole family could be a good choice. It’s hard to go wrong with a vehicle that makes your giftee’s life easier and/or more enjoyable.
• Their style preferences. Knowing what aesthetics (i.e. angular versus rounded, sleek versus chunky, physical knobs and dials versus touchscreens, etc.) the giftee leans toward can help you nail a car they’ll love looking at (and being in). 

Reliability is another huge factor here. Let’s be honest: If someone gave you a car that cost an arm and a leg to maintain after a few months or years of use, you may be bitter. Look at multiple reviews from different sources to ensure you buy something that not only fits the giftee’s preferences, but is also a durable vehicle with minimal maintenance (unless they like working on cars, in which case a fixer-upper may be just what they need!). 

Gifting a Car: The Safe Way

It’s difficult to recommend gifting a car as a surprise unless you know, beyond the shadow of a doubt, that the giftee will love the car you pick. 

Instead, you can give them the gift of car shopping (on your dime). The obvious benefit here is that they get to choose the car, and you don’t have to deal with processes such as paying a gift tax and title transfers. 

If you want the giftee to buy the car, you can transfer the money for it into their account – although gift tax will apply here if you transfer over $17,000. If you want to avoid that, your other option is co-signing for the vehicle with them. Co-signing has a slew of benefits, including potentially lowering the necessary downpayment or interest rate of your giftee’s car of choice. However, it does make you, as the co-signer, liable for the vehicle to an extent. If you want to learn more about co-signing, you’re in luck – we wrote a whole article on how it works, and another on auto financing to boot. 

Buying a car as a gift is a big decision, but taking the right steps (equipped with the right information) will set you up for success. Happy Haulerdays!