With some of life’s questions, there are no hard-and-fast, right-or-wrong answers. The best approach to take will depend on your circumstances and where your priorities lie. Such is the case when it comes to figuring out what to do with your current car when purchasing a new one.
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You have three choices. You can trade it in to a dealer. You can sell it on your own to a private party. You can donate it to charity. The fourth choice, parking it in your yard and reducing home values in your neighborhood, does you and the people around you no good.
Vehicle age often plays a role in this decision. Data from a recent Bureau of Labor Statistics consumer expenditure survey indicates that for households disposing of a vehicle during 2012, the average age of vehicles sold to private parties was 15 years, while the average trade-in was 9 years old. The average age of vehicles that were donated or given away was 14 years.
The fact that trade-ins tend to be newer than private-party sales isn’t surprising. Older cars with lots of miles don’t hold much appeal for dealers, and you’ll have a harder time negotiating a fair trade-in if your car is the automotive equivalent of a senior citizen.
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As far as donations go, most charities will take your clunker off your hands regardless of its age or condition. If the car isn’t drivable or is in poor shape, the charity will sell it at auction or to a salvage yard, and channel the proceeds to its cause.
If you’re donating simply to get rid of your car and for the good karma, the process is simple and straightforward. Place a call to the charity of your choice, and wait for some kind soul to show up at your door and drive or tow your car away so it can do its part assisting the greater good.
Donating your car can net you tax benefits. If you’re donating with the intention of maximizing these tax benefits, you’ll have to jump through a few hoops, and we’ll talk more about that later on in this article.
Whether you choose to trade in your car, donate it, or make a private-party sale, you’ll find each route has benefits and drawbacks. Below are pros and cons of each approach.
Trading in your car: Pros
Convenience. If you sell your car to a private party, you’ll have to do some legwork. It’ll be necessary for you to take photos of your car and post an online ad. You’ll then need to meet with prospective buyers and field bids. This can all add up to huge hassle if you’re not in the frame of mind to tackle these responsibilities.
None of this is necessary if you’re trading in your car. Your work begins and ends with driving your car down to the dealership and spending a few minutes negotiating with the dealer. If you’re looking for a relatively low-effort approach to making money on your older car, trading it in to a dealer makes sense.
Speed. If you’re trading in your car, you can count on the transaction being completed quickly. This is not the case with a private-party sale. While you can certainly get things moving in your favor by ensuring your ad presents your vehicle in the most appealing light, at the end of the day, you have no control over the timeliness and quality of the bids submitted. Your car could be on the market for weeks or months before you receive a satisfactory bid.
Trading in your car: Cons
Lower payout. To understand why a trade-in often nets you less cash than a private-party sale, you need to understand what happens after a dealer purchases your vehicle.
The vehicle likely will be spruced up a bit and then sold. For the dealer to make a profit on the sale, the selling price needs to be higher than the price paid to you during the trade. However, if the vehicle is to stand a fair chance of finding a buyer, its selling price needs to be in the ballpark of its market value. Therefore, for the dealer to profit on the sale, the price paid to you during the trade-in needs to be lower than the vehicle’s market value.
You can protect yourself from being taken advantage of by doing some research regarding the market value of your used car. One useful resource is Kelley Blue Book. This site provides access to a tool that factors in location, mileage, vehicle condition, and factory options to determine pricing both for trade-ins and private-party sales. Use this pricing to get yourself the best possible deal on your used car when negotiating your trade-in with the dealer.
Sellers should heed the following warning, though. If a dealer agrees to offer you an unusually high amount of money for your trade-in, it’s a strong indicator the dealer plans to make money on the transaction by inflating the price of your new-car purchase, selling you overpriced accessories or services, or by arranging a higher-interest loan. In situations like this, pay close attention to all aspects of your new-car purchase to avoid being exploited.
Selling your car to a private party: Pros
Bigger payout. By selling your car to a private party, you’re cutting out the middleman, and this allows you to get the full market-value price of your vehicle. You can easily realize a financial gain of hundreds or even thousands of dollars.
If your car is an older vehicle with lots of miles, from a financial perspective, selling to a private party can be especially beneficial. Older cars are more difficult for dealers to sell on the lot, and for this reason, they tend to garner low prices during trade-ins. A private-party sale will help you score a deal that more closely reflects the true market value of your older used car.
Control over the process. Yes, selling your car to a private party can take a long time, and yes, it can be tedious. However, the upside is you are in control of the process from start to finish. If you get a bid that’s unsatisfactory, you can simply decline, and wait for the next bid to roll in. If you’re consistently getting bids that are lower than you’d like, you can choose to do some work on the car to upgrade its value. The ball is in your court every step of the way, and this isn’t the case when negotiating a trade-in.
Selling your car to a private party: Cons
Takes longer. As mentioned, a private-party sale doesn’t always happen overnight, and it’s difficult to predict when an offer will come your way. If you’re looking for the quickest way to earn cash from a sale, this is not the route to take.
Requires time and effort. From taking photos of your vehicle to taking the time to meet with potential buyers and screen offers, you can expect to put a good deal of energy into navigating all aspects of a private-party sale. While this will help you sell your car for more than you would if you were to trade it in, it’s important to remember your time has value. The financial gain arising from a private-party sale may not be worth it once you attach a value to the hours spent orchestrating the transaction.
May present safety concerns. With a private-party sale, you’re putting yourself in a vulnerable situation with a stranger. There are steps you can take to minimize your safety risk, such as staging the meeting in a public place. However, there are certain circumstances unique to the car-selling process that will be tricky for you to finesse.
For example, the potential buyer is entitled to take the car for a test drive. Being in the vehicle during this process places you in a vulnerable position, but if you’re not in the vehicle, you make it very easy for someone to drive off with your car.
Another concern is fraudulent payment for your vehicle. An escrow service can protect you from this to some degree, but be aware that it’s possible for scammers to create fake escrow services.
In the process of passing along service information and transferring titles, you may find yourself sharing personal details that could make it easy for you to become the victim of identity theft. Minimize your risk in this area by using a marker to block out personal information such as credit card numbers and phone numbers when handing off your service records to a buyer.
Donating your car: Pros
Feels great. It’s impossible to overemphasize the feel-good aspect of donating your car. It can be quite uplifting to provide assistance to others.
Also, what goes around, comes around. By providing this kind of generosity to others, you may just boost your karmic chances of being on the receiving end of a good Samaritan’s kindness should you ever need help in any way at some point in the future.
Helps a good cause. There are many charities out there, and they’re all doing their part to make the world a better place. Whether your passion lies with supporting the needy, animals, or the environment, if you donate your car to your preferred charity, you’ll help further your cause.
Can provide tax benefits. Donating your car can save you money when tax time rolls around. Keep in mind, though, that the IRS doesn’t recognize donations made to all charities. For your donation to ease your tax burden, it must be made to an organization deemed eligible by the IRS to receive tax-deductible charitable contributions. The IRS site offers a useful tool allowing you to check the status of your favorite charities.
Can be simple. If you’re donating your car purely to take it off your hands and provide assistance to a charity, the process couldn’t be simpler. All you need to do is alert the charity of your intention, and the car will be picked up at your doorstep.
If you’d like to realize optimum tax benefits with your donation, the process is considerably more complicated, which leads us to the cons of donating your old car.
Donating your car: Cons
Tax benefit may be too small to justify the effort of deducting your donation. When donating your car, the IRS allows you to claim your vehicle’s full market value in certain cases, but stringent guidelines make qualifying for this a rare occurrence. In most cases, deductions in this area are limited to the amount the vehicle was sold or salvaged for by the charity, which is typically much less than its market value.
If the car is sold by the charity as part of a batch, the organization will receive a flat fee for each vehicle. This fee may be as low as $45.
According to rules posted on the IRS site, you may claim fair market value for your car donation only under the following circumstances:
• The charity makes "significant intervening use" of your car. This refers to cases in which the charity used the car to deliver meals to the poor, for example.
• The charity "makes a material improvement" to your car. This goes beyond minor upgrades and refers to repairs impacting the value of your car in a major way.
• The charity "donates or sells the vehicle to a needy individual at a significantly below-market price." This applies to cases in which the charity uses the vehicle to directly assist indigent individuals in dire need of transportation.
Achieving tax benefits can be tedious and time-consuming. If you’re in the habit of submitting your tax returns via a 1040EZ, this will need to change if you’re donating your car. You’ll have to itemize your deductions if you intend to use your car donation to lower your tax burden, and this adds complexity to the tax-preparation process.
It’s also important to realize you probably won’t get swift closure when handling the tax paperwork associated with your car donation. As previously mentioned, in most cases, you’ll need to claim the value at which your car was sold for by the charity. This means you’ll need to wait for the sale to take place, and this could take weeks or months. After the sale occurs, the charity will send you a receipt detailing the sale price.
If the sale doesn’t take place in time for you to include the car’s sale price with your tax return, you can delay your return by filing a six-month tax extension, which will give you time to receive the car’s sale price from the charity. Your second option is to file the return on time without claiming the deduction. Once you’ve received the car’s sales price, you can follow up with an amended return that includes the deduction.
May trigger an audit if you use the donation to claim tax benefits. According to information published by CharityWatch, a charity watchdog founded more than 20 years ago, non-cash donations are one of the IRS’ most commonly used indicators when deciding whether to initiate an audit.
If you’re deducting your car donation on your taxes, keep careful records, and hold on to your receipts for a few years after filing your return. The IRS will look at three years of tax returns in an audit and will go back as far as six years if "substantial error" is identified.
Make an informed decision
Whether you decide to trade in your car, donate it, or sell it to a private party, knowing the risks and benefits of each approach will help you make an informed decision.
Whichever approach you choose, know that in the end, it’s worth the effort. Disposing of your old car will help you make room for a new vehicle equipped to take you on fresh adventures.