What You Need to Know About Giving a Car as a Gift
Whether it's for an anniversary, a college graduation, or to celebrate another major milestone, financing a car for someone else is a memorable gift.
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Gifting a car can be more complicated than surprising someone with a piece of new jewelry or a set of golf clubs. There are different rules depending on whether the car is used or new, and whether you want it to be a surprise or not.
So how do you go about giving a car as a gift and what financial obligations do you (and the recipient) need to be aware of? Here's what to know.
Rules for Used vs. New Car Gifts
The easiest way to give someone else a vehicle without having to finance it is to buy or own the car outright and transfer the title to the recipient. To protect yourself from ownership responsibility, you should then draft a bill of sale that includes the make and model of the car, purchase price, the vehicle identification number (VIN), and the odometer reading at the time of gifting. The bill of sale should be signed by both you and the recipient. With the title and a bill of sale in hand, the recipient can head to a department of motor vehicles or the secretary of state's office to transfer the title into their name.
You could also purchase a new or used car from a dealer, where the rules will be similar to purchasing a new car. Whether purchasing new or used, the first step is going to the dealership and getting them involved in the process. After all, they've done this before. They have departments specifically dedicated to financing and insurance, and they're experts in the state's titling requirements. Also, be sure to plan ahead—dealerships have busy seasons and there may be supply chain issues.
What Financing is Available?
In most cases, purchasing from a dealer will require financing. If it doesn't need to be a surprise and you want the recipient to test drive the car, you could go to the dealership together. Perhaps your gift could be in the form of a generous down payment, and then you could add the recipient as a cosigner or joint applicant on the loan if they agree to the financing terms.
If you have great credit and want the car to be a surprise, you can finance it in your name and put both names on the title as co-owners. You do not have to put both names on the registration or insurance, just the primary driver's name. All you'll need is the giant red bow.
If your credit alone isn't strong enough and the gift recipient is your spouse, a dealership will sometimes run both spouses' credit to enable the purchase. The recipient could then come into the dealership after the car is delivered to cosign the loan and finalize the paperwork.
Whose Name Goes on the Title?
Ideally, you would be able to purchase a vehicle with your name on the loan and the recipient's name on the title. However, giving a car as a gift makes this a little different. Since a title designates vehicle ownership, some states—and individual dealerships—may not allow you to put someone's name on the title without the individual's signoff on that responsibility. If you get your dealership involved early in the process, they can work with you to ensure that all the required papers are signed by both parties after the gift car is delivered.
Alternatively, you can have both names on the title. Just be aware that how the names appear on the title may affect legal responsibilities, depending on the state you live in. Sometimes, if the vehicle will be owned jointly and the names are joined by "and," both owners must sign the title documents for a sale or transfer to be legal. If "or" or "and/or" appears between the owners' names, sometimes either owner can sign the title as the seller or purchaser of the vehicle.
What About Insurance?
Contact your insurance agent ahead of time to go over the options. If you already have an insurance policy, you could add the new vehicle to the policy.
A lot of insurance policies also have something called automatic coverage clauses, which typically give you 14 to 30 days to report a new car purchase to the insurance company. During that period, you have automatic coverage on a newly purchased vehicle before you must officially add it to your policy or otherwise cover it.
Your insurance agent can have a lot of leeway in terms of when coverage starts. You might ask your agent to "bind" a policy and send the paperwork over after the car has been gifted. A verbal or written binder from your agent indicates that the coverage is in place but the policy has not been issued yet.
What Taxes You'll Pay: Sales and Gift
If you already fully own the vehicle and gift it, there may not be any sales tax, or the exchange may qualify for an exemption. However, if you buy a vehicle and then gift it, you'll likely have to pay sales tax on the purchase. This all depends on your state's tax rules, but generally, the sales tax rate is around 6%. Some states also charge a separate vehicle use or property tax.
Giving a car as a gift might also mean paying a gift tax. For 2022, you can give a gift of
Giving a Gift to Remember
Giving a car as a gift is a generous gesture, but there are some hoops to jump through. By following these steps, knowing your financing options, and getting the dealership involved, you should be able to give a memorable gift to your loved one.
