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Are Car Sale Proceeds Income?

I had a friend ask me whether the proceeds from a car sale were considered income and so I thought I’d do a little digging outside of my off-the-cuff answer of “no.”

Usually when you buy a car, you drive it around, it loses value, and you sell it sometime later at a price under what you paid for it. You don’t claim depreciation while you drive it and so your cost basis for the car is at what you paid for it. When you sell it, it’s at a loss and so you’ve generated no income from the sale. You do not claim the proceeds as income on your tax return.

There are situations where you are supposed to declare it as income. Let’s say you’re a car buff, you buy a junker at $500, fix it up and sell it at $2000. You’ve generated $1,500 of income from that sale and so you must declare that as income. Of course, you can deduct the use of your garage, tools, etc. The second situation is if you’re a business and you’ve been depreciating the vehicle on an accelerated schedule – if you sell before the schedule expires then you have to recapture the deductions (chances are you’re not, but if you want more information then consult IRS Pub 946 – How To Depreciate Property [3])