Buying and selling cars and taxes

LeeH · 10-18-2005, 10:26 PM

Let's say I bought two cars last year as part of my hobby. A year later I sell one car for more money than I paid. The other car I sell for less than I paid. How does the IRS treat these sales?

Andras Nagy · 10-19-2005, 04:06 AM

They don't.

red-beard · red-beard's Garage

You would use the Capital Gain/Loss form, and state the original basis for the asset and the sold value of the asset.

Technically, if you have a freak'n garage sale, you would need to file these forms...

Andras Nagy · 10-19-2005, 05:16 AM

Actually, this is not necessary. The IRS doesn't really care if you made a piddling amount of profit from your "hobby". They just care about the "big" stuff, such as the sale of your house. But even then, you have a $250k deduction ($500k if you're married, filing jointly), and even then, you can make sure that your "basis" and your "upgrades" negated any "profit".

Enjoy buying and selling; there would be no public record of these sales, and the sums involved are not worth getting into a lather about.

Have fun.

competentone · 10-19-2005, 07:02 AM

Quote:

Originally posted by red-beard
You would use the Capital Gain/Loss form, and state the original basis for the asset and the sold value of the asset.

Technically, if you have a freak'n garage sale, you would need to file these forms...

I believe you should be paying the "collectibles" capital gains tax too -- which is around 25%, if I remember correctly.

I also think you can't take any losses on collectibles; you are supposed to pay if you make money, but aren't allowed to offset any gains you make by losses you might have.

LeeH · 10-19-2005, 07:24 AM

Quote:

Originally posted by competentone
...you are supposed to pay if you make money, but aren't allowed to offset any gains you make by losses you might have.

For some reason this is the answer I was expecting.

competentone · 10-19-2005, 07:30 AM

...but cars are depreciating assets, nobody makes money on their hobby cars...

(Just watch the deposits, or other transactions that can be tracked.)

Andras Nagy · 10-19-2005, 07:38 AM

Lee,

Sorry for my continuing to be worried for you, but you are getting bad advice if anyone says that you need to report any of this "hobby" stuff to the IRS.

The only people who MUST report to IRS are people who are in the business of buying and selling cars. If you are in the business of buying and selling, then that is your business, and you will have to declare your profits, your losses, and you expenses to the IRS. But if you have income from a profession or a job, and you filed 1040's, that is where you will declare your "income". And your hobby is not an "income".

But you clearly stated you are doing this as a hobby, and therefore, YOU DO NOT HAVE TO DECLARE ANY PROFITS AND LOSSES ON YOUR HOBBY.

competentone · 10-19-2005, 07:46 AM

Quote:

Originally posted by Andras Nagy
...you are getting bad advice if anyone says that you need to report any of this "hobby" stuff to the IRS.

... YOU DO NOT HAVE TO DECLARE ANY PROFITS AND LOSSES ON YOUR HOBBY.

http://www.irs.gov/individuals/article/0,,id=140252,00.html

You must report all of your hobby income on line 21 of Form 1040. A hobby is defined as an activity not engaged in for profit.

You may be entitled to certain hobby deductions, but only up to the amount of income reported for each hobby. However, there are other limitations as well. For additional information, refer to Publication 535, Business Expenses. Publication 535 is available for download, or you may request a copy by calling 1-800-829-3676.

pwd72s · 10-19-2005, 08:25 AM

Yup...capital gains taxes apply. I asked a tax attorney after getting an offer on my car that was beyond 6 times what I paid for it...Andras's advice could end you up in serious trouble with the IRS if big bucks, say above $50,000 are involved.

Andras Nagy · 10-19-2005, 08:39 AM

And that was my entire point. I doubt many people are making $50k PROFIT on their "hobby", per transaction. If you were making this kind of money on each sale, why keep doing what you're doing? Become a Pro, and make serious money buying and selling cars.

And then only if there were some public record of the transaction of these hobby transactions would the IRS even know you did it, especially if you filed your 1040 of your "real" job's income.

Com'mon guys, there is the real world (in which even the most ardent "hobbyist" doesn't declare), and then there is "How I stopped worrying and learned to love the Bomb".

So Lee, if you have made a bundle, the PERHAPS you need to talk to your tax attorney. But I'll still stand by my real-world advice, if you made only one or two thousand dollars profit, netting out your gains and your losses, just take that money, put it back into another car, and you will owe no taxes.

Does anyone have any facts of prior deals or profits in which the IRS went after a hobbyist for taxes, capital gains or otherwise?

Now I will shut up.

Neilk · 10-19-2005, 09:23 AM

Well let's say that you do make a bundle selling your car, are you allowed to deduct any expenses from your profit?

Burnin' oil · 10-19-2005, 10:14 AM

Quote:

Originally posted by Andras Nagy

But you clearly stated you are doing this as a hobby, and therefore, YOU DO NOT HAVE TO DECLARE ANY PROFITS AND LOSSES ON YOUR HOBBY.

As of now, I no longer have a job. But I do have a couple hobbies. . .

Andras Nagy · 10-19-2005, 10:20 AM

I have a certain personality defect that keeps me responding, so perhaps this time I really will shut up. But......

If you are now unemployed, your previous empoyment is still your profession. You're just not earning any money doing it.

So selling Porsches is still your hobby, and to the IRS, you are invisible (in terms of your making money with your hobby).

Now I promise to shut up and let other take on the mantle of this Crusade.

Bye.

techweenie · techweenie's Garage

Most of us have a poor paper trail on the parts we buy and sell. But if you were to really parse it out financially -- portion of your property used to store parts/cars; portion of your insurance/utilities/whatever dedicated to protecting parts/cars, transportation, phone calls about parts/cars, etc. you'd probably have little profit to report. That's what makes it a hobby...

legion · 10-19-2005, 12:18 PM

Wait...we're supposed to have a little profit? My cars have all been big money pits. I must have ignored phase 2...

LeeH · 10-19-2005, 10:20 PM

Hmmm... from the IRS web site: "An activity is presumed carried on for profit if it produced a profit in at least 3 of the last 5 years."

Joeaksa · 10-20-2005, 06:18 AM

Lets move this to another catagory. Say you like stereo equipment. Buy one used last year year, find a second one at a garage sale and so on.

You sell both of them at a garage sale this fall and you really think that the IRS is going to care about making a few hundred bux on this? How is it different? Switch the subject to guns, or used 911 parts or sewing needles?

Personally I would not worry about it until it becomes a business.

JoeA