Dear Driving for Dollars,

My mother gave me a car for which I listed the value as $8,500. I later sold it for $9,500. Do I have to pay capital gains tax?

— Lea

Dear Lea,

Yes, you will most likely have to pay capital gains tax. First, you’ll need to determine what the IRS calls the “adjusted basis,” which in your case is probably the value of the car just before your mother gave it to you. However, it could be more or less, depending on whether there were improvements or something that decreased its value. See IRS Publication 551 for more details. Next, you’ll subtract the adjusted basis from the fair market value — in your case the sale price of the car — to determine your profit or loss. If there is a profit, you’ll need to pay capital gains tax on the profit only, not the entire $9,500 sale price of the car.

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