Tax Angle re: Dealer Trade-In Versus Private Buy/Sell

Guys, I'm looking to swap my '99 C2 with a '02 C2; I like the '01 model alot. Reasons aside, I wanted some advice on the benefits of a dealer trade-in versus a private buy/sell transaction where you sell to Private Buyer and buy from Private Seller. In most states -- including Illinois, where I am located -- I understand that a dealer swap means that you just pay taxes on the price difference between your trade-in (assume 55K, just as an example) and the new Porsche (assume 65K, again, just as an example). With a 8.75% IL tax rate, I save myself significant $'s if I just pay on the 10K difference versus on the 65K. My confusion is with respect to an private buy/sell transaction. When I sell to Private Buyer, I just sell at $55K and that is all I get. However, when I buy from Private Seller do I pay 8.75% taxes on the whole amount of $65K? I've heard conflicting stories of either (A) having to pay the full tax amount, or (B) having to pay no tax given that it is a private transaction. To add to the confusion, I know that individual states probably have individual rules governing private buyer/seller transactions. Any Illinois-specific advice would also be highly appreciated. I know you can generally get a better deal from Private Sellers, etc., but I am specifically concerned about the tax angle. If I truly have to pay 8.75% on the sale price paid to a Private Seller, then I'm much worse off going the Private route...I think. Regards.

You are pretty much right on the ball. Buyers pay the sales tax, sellers don't. There is no tax on trade-ins. So, yes, you will have to pay the tax on the full purchase price of the vehicle you are purchasing if you don't have a trade in, regardless of whether this is a private sale or a dealer sale. Case in point. Had a friend who had a 1990(?) targa. He had a buyer who was willing to buy the targa at a much higher price than the dealer was willing to give as trade. BUT, my friend wanted the tax advantage of paying tax only on the difference between the trade-in value and the purchase price. So, he convinced the dealer to take in the targa at the buyers agreed price, not the dealer's trade in offer, and the dealer turned right around and sold the car to the buyer my friend had found. The dealer paid no tax since this was a trade, not a sale, and the buyer paid the same tax he would have paid had he bought it directly from my friend. My friend then used the credit from the sale/trade towards the purchase of a brand new 996. He only had to pay taxes on the difference. The targa buyer got the car for the agreed price (he paid taxes on the full purchase price), my friend paid less taxes on his own purchase, and the dealer, for agreeing to the above and doing extra paper work, not only got a sale but also earned a loyal customer. Happy faces all around. Talk about innovative thinking!

Some states , like California , do not allow this delta . In this state you still have to pay full sales tax on the new car , even if you trade in.

Thanks Palting and MKW. Let me numerically show what I understand to be true then, again using illustrative (but fairly realistic) numbers: � Option 1: Trade in car for 55K and buy one for 65K. Total outlay is 10K + 8.75%*10K = 10,875K � Option 2: Sell car to Private Buyer for 55K, and buy from Private Seller for 61K (supposedly a 4K "discount" to dealer price). Total net outlay is 6K + 8.75%*61K = $11,338. So despite getting a much better "deal" in the form of a 4K lower price from a private buyer (which is on the high side in the first place), you actually end up paying $11,338 - $10,875 = $463 more because of the tax treatment. Given the math, doesn't it make sense -- at least in IL -- to go with a trade-in unless somebody is willing to part with their private car at a huge discount. Any sellers? Regards.

The only flaw I see in the above example is that the dealer trade-in and the private sale price are rarely, if ever, equal. The private sale price for your '99 C2 should be several $K (2k-3k) more than the trade-in value. You either have a very generous dealer, or a cheapskate private buyer. In the real world, the difference between what you trade your car in for and what you can get from the direct sale of your car more than makes up for the tax savings of the trade in. Factor in a $3k difference between the trade in and the private sale of your '99 C2 in your above equation and you will see what I mean. That's what makes the above example I gave unique in that my friend got his cake and ate it too.

That's actually a really good point I neglected to consider. So you actually benefit from both a lower purchase price from Private Seller than dealer, and also a higher sale price to Private Buyer than dealer, so you benefit on both ends, and can therefore potentially come out ahead. Of course doing a private buy/sell also means there are opportunity costs, including advertising, dealing with the hassles of a two-part transaction, timing uncertainty of the buy/sell, etc., etc., but don't get me started on those now...

I Illinois you have to pay all the tax on the private sale. Suggestion, Move to Missori.... There you have (or had) a 30 day grace period to provide the DMV with a bill of sale for a sold car when you register a new car... tax on the Difference.... Well this got me into to trouble when I move to KY which was a full sale price tax.. I had to pay KY the extra sales tax, so the tax I paid total was what I would have paid had I bought the car in KY... jerks! He is the suggestion.. List the ar for sale. Find a private buyer... then put the sale through your dealer as discribed above. I have done this twive.. I paid $300 total sales tax when I bought my Turbo, after selling my 996, to a private person, but the dealership did the paper work..

I negoiated as part of the new car deal the dealer doing what they called a "pass through" sale of my trade-in to my buyer. They obviously do this a great deal as they had forms all made up to inform my buyer that they were providing no warranty, etc. regarding the sale. The only down side was that they kept my $40K while we waited three months for the new car. They claimed that this was required so it didn't look like we did the deal only to avoid taxes. They don't pay interest on deposits, so this was a pretty good deal for them. But I saved the sales tax on $40K so I wasn't complaining too loadly.

[quote]Originally posted by FELKER: <strong> Well this got me into to trouble when I move to KY which was a full sale price tax.. I had to pay KY the extra sales tax, so the tax I paid total was what I would have paid had I bought the car in KY... jerks! </strong><hr></blockquote> Felker, Where in Ky did you live? I hate the way the tax works as well. If I went to trade my 993 in on a cheaper new car. I get no tax credit and have to pay tax on the full MSRP. If on a used I get the credit. If i sold the 993 to an individual, and then bought a used car from dealer or individual I would pay full tax on the value of the car. How else do you think KY can afford to pay for all those people on disability, and medicaid to sit at home with no jobs and smoke cigarettes and drink beer all day? Greg

The way to bypass the tax is through, what we call in Florida, "A Courtesy Trade". I have done this several times. You can get retail for your car, have the dealership run the car through the dealership as a trade-in and you get all the benefits of the taxess on the trade in. The dealership will charge you a couple of hundred dollars for the paperwork. Your buyer has the opportunity to get a warranty with the car, which you wouldn't be able to provide him with. Plus the the dealership does all the title and tag work. As far as the dealership keeping your money for any length of time, that has never happened to me. If you have any questions, email me direct. Jim Newman

What about buying the car in a sales tax cap state and taking a little vacation? SC cap is $300.

[quote]Originally posted by jason952: <strong>What about buying the car in a sales tax cap state and taking a little vacation? SC cap is $300.</strong><hr></blockquote> In Florida, the tax is paid based on where you live not where I buy, for example... If I go to SC to buy the car, when I bring it home I have to pay taxes to get my tag or prove that they have been paid based on the county rate. Jim Newman

I had the same experience last Oct. as Roger with Manhattan Motors except that I didn't have to wait three months--the trade took place on the same day I picked up my new '02 cabriolet. I was trading in a '99 996 that was a daily driver with 55k miles. Between the milage and the events of 9/11, the dealer's wholesalers were offering me only $40k for the old car. I found a private buyer in New Jersey for $45k. On the day my new car was ready to be picked up, the buyer signed a contract with me to buy my '99 and gave me a $500 deposit. I took it and the car to the dealer who delivered my new car and credited me with a trade in of $45. I saved $3,825 in sales taxes plus the additional $5,000 from the private buyer. The private buyer got his insurance and tags the next day and picked up the '99 from the dealer.

Thanks to all who have provided their suggestions. I can see there have been numerous examples of working with a dealer/Private Buyer to get the best of both worlds. It clearly works out better in that you get a higher purchase price from the Private Buyer, and avoid paying taxes on the new car from the dealer. In IL, as in FL, you would need to make whole any taxes up to 8.75% that were not paid, so a trip to SC to purchase wouldn't work. Many, many thanks to all. You've all been great. Regards.