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Are you thinking about buying a car for a family member? Maybe your straight-A student just graduated high school, or your mom needs a lower maintenance vehicle for retirement. Perhaps you’d like to surprise your husband for his birthday.

No matter the occasion, gifting a car to a family member is a little different than buying one for your own use, mainly because of the taxes you’ll pay. In this guide, we’ll look at what you need to know before you invest in a vehicle for someone else. We will cover car sales tax and gift tax, as well as terms like “fair market value” and what it means for your car gift tax.

Consider Your Purchase Carefully

In the same way that you wouldn’t necessarily gift a pet to someone else, a car is a gift you’ll want to consider carefully before taking the leap. Cars are a lot of responsibility, and they’re expensive to maintain. Not only will your family member be responsible for fuel and maintenance, but also for insurance, registration, and taxes.

If you don’t want to pay for those expenses, it may be a good idea to discuss your purchase with your family member before you make it. Gifting a car to a family member as a surprise can be more of a burden than a blessing.

Consider Your Finances, Too!

There are three points to remember when you’re gifting a car to a family member. These are as follows:

  1. You will have to own the vehicle (paid in full) before you transfer the car title as a gift.
  2. You will likely have to pay a gift tax on the car. This can vary by state and by year but expect to pay between 18 and 40% tax on your gift. Technically, this is owed by the recipient, but most gift-givers choose to pay the gift tax themselves.
  3. The gift tax you pay on your vehicle is in addition to the sales tax you’ll pay when you initially purchase the car.

As you can see, the cost of gifting a car start to add up. Be sure you’re fully prepared for all the expenses you’ll incur.

Steps to Gift a Car to a Family Member

Once you’ve discussed finances and those of your recipient, it’s time to transfer the title of your car.

First, write yourself a bill of sale. The purchase amount can be just a dollar if you wish. This is the step that will both exempt you from future liability for the car, and also help you avoid sales tax. Your bill of sale should include:

  • The car’s make and model
  • The purchase price
  • The odometer reading
  • The vehicle identification number (VIN)
  • Signatures of both you and the recipient

Next, you’ll want to make sure your recipient is properly insured in your state. Shop around for a new policy or simply the vehicle to the recipient’s existing policy.

Finally, transfer the title to the recipient. You can do this at the DMV but call ahead to ensure a notary is on staff. Your signature will likely have to be notarized before the transfer can be complete.

That’s it! That’s all there is to gifting a car to a family member!

Do I Have to Pay Sales Tax or Gift Tax on a Gifted Car?

That depends upon where you live. In some states, you can request an exemption. In other states, your bill of sale will exempt you from taxes.

If you have questions about the process of gifting a car to a family member and taxes in your state, contact your local DMV. Department of Motor Vehicle websites are treasure troves of information about taxes and title transfers, so begin there before you spend a long time in line.

What If I Want to Gift a Vehicle in My Will?

Generally speaking, the tangible and financial assets you will to your heirs will go through probate when you die. This can take a very long time–from months to years–and your loved ones or your estate will incur heavy attorney’s fees.

It may be in everyone’s best interest if you transfer the title and gift your vehicle now. You and the recipient can agree on who will drive the vehicle and pay for insurance and maintenance fees. When you do pass, your loved one can simply commence driving the car.

Summary: Gifting and Car Sales Tax

Gifting a car to a family member is a bit of a different animal than buying a car for yourself. However, you typically won’t need an attorney or accountant as most people can handle this relatively simple business on their own.

Should you have any questions about your local requirements and the process in your area, the Department of Motor Vehicles is a good place to start.