Key takeaways

  • Remember that a vehicle is costly to maintain and might not be the right gift for those not in dire need of a vehicle.
  • To gift someone a vehicle, you must transfer the vehicle title to their name and create a bill of sale.
  • Selling a vehicle for $1 instead of gifting it could result in your recipient paying sales tax based on the car’s fair market value — it’s better to stick with the official gifting process.

While holiday TV advertising suggests otherwise, gifting a vehicle over the holidays is less common than you think. And with vehicle prices averaging $48,451, according to Kelley Blue Book, the homemade route may be smarter. But if you can’t resist the big red bow, ensure your present doesn’t present future legal issues for the recipient.

1. Consider whether a car is the best gift

While buying someone a car is a grand gesture, it isn’t always the right for the recipient’s future finances. It’s important to remember that gas, insurance and maintenance costs add up, averaging over $10,000 per year in 2022, according to AAA.

Consider if the new owner can afford consistent upkeep for the vehicle, if they have a spot to store it and, most importantly, if they need a vehicle.

2. Acquire the vehicle

If you already own the vehicle — and have completely paid off any auto loan you took off to purchase it — you can move on to step three.

But if you’re buying the vehicle just to gift it, you first will need proof of insurance to show the dealership. In this case, you can temporarily add the vehicle to your policy or ask the insurance company for a verbal or written binder. The latter states that the vehicle is covered, but the policy has yet to be issued.

3. Write a bill of sale

Legal requirements vary by state, but if you reside in one of the 16 states where bills of sale are enforced, it’s best to get that in order before the holiday. The bill of sale is legal documentation that proves that the vehicle was sold. In this case, it will outline the ownership details to whom you are gifting. The following information is required, but check with your state’s Department of Motor Vehicles for further guidance:

  • VIN
  • Vehicle details, including make, model, color and year
  • Odometer reading
  • Payment details — in this case, write in “gift”
  • Terms and conditions
  • Buyer and seller contact information
  • Signatures from the buyer and seller

4. Transfer the title

The title serves as proof of ownership, so once you gift the vehicle, it’s essential to transfer the title to their name. This process varies by state, so check out your local DMV’s website for specific details. But typically, you’ll need the date of sale, odometer reading and buyer information. The title will also request the vehicle’s purchase price. Simply write “gift.” To seal the deal, get the title notarized.

5. Complete an affidavit of motor vehicle gift transfer form

Along with the title documentation, some states require additional proof of ownership. By filling out an affidavit of motor vehicle transfer form, you will give full legal ownership to the new owner. Contact your DMV and request the form. As mentioned, the specifics of this documentation vary by state, but typically, it will require some information on you and the giftee.

6. Fill out your tax forms

The final step in the gift-giving process is to address the correct tax documentation, which varies depending on your state. Search the web for your state plus “gifting a car.”

At the national level, the IRS requires disclosure of gifts above a certain amount due to gift tax rules. You’ll have to file a gift tax return if the vehicle’s fair market value brings the total value of gifts you’ve given the recipient in 2023 above $17,000.

That said, even if the gifted car is worth more than $17,000, you likely won’t have to pay taxes on the gift. The amount above the $17,000 threshold counts against a lifetime exclusion of $12.92 million — you’ll only have to pay taxes if your lifetime total surpasses that enormous sum.

Bankrate tip
To ensure you follow the proper legal procedures, consider consulting a tax professional.

Gifting a car vs. selling for $1

While some gifters decide to sell the vehicle to the recipient for $1 in hopes of avoiding gift taxes, it’s not always the best idea. For one, it doesn’t make the process easier: Gifters must still jump through documentation hoops to complete the transfer. Plus, the recipient will likely have to pay the sales tax for the vehicle based on its current fair market value rather than the $1 sales price.

The bottom line

Before heading to the dealership this holiday season, consider how gifting a depreciating asset might not be the best move for you or the recipient. But if the giftee can afford and would benefit from a new vehicle, take the necessary steps and don’t forget to register the vehicle and encourage the recipient to find the right insurance.