How to Decide Whether to Sell or Trade-in Your Car in Massachusetts

December, 02, 2020

When you finally decide to buy a new car, there are different avenues you can take to successfully sell your old one. For starters, you could trade it in at a dealership or sell it privately to a buyer of your choice. Each method works differently and comes with its own benefits and challenges.

More often than not, it’s always better to sell your car privately than to trade it in. You’re able to take control of the situation and make the most out of the transaction. Trade-ins are frequently characterized by dealers who want to make the most money out of the transaction.

As such, you may encounter all or either of the following:

• A dealer that assumes they are doing you a favor. He or she may feel that you have nowhere else to go and that you have limited selling options. This provides an opportunity for them to take advantage of the situation.
• A dealer that intentionally low-balls your trade-in offer to make more money. With a trade-in, you give the dealer the opportunity to set the value for your car. Your chances of obtaining the full retail value are hence, decreased tremendously.
• Your vehicle model and make may not be trading well at a certain dealership. This is especially if you have an older car or less popular variant. It increases the chances of you getting a lower value than what you’d have gotten through a private buyer.
• You may have limited choices in picking the car that you want. Selling your car to a private buyer allows you to take the cash and walk into any other dealership to buy your second car. You could pick a different model and make altogether. When it comes to trade-ins, you may have no choice but to pick one from the same car manufacturer.
• A dealer that isn’t aware of the true value of your vehicle. This may happen where you trade in your car at a dealership that doesn’t deal with your specific vehicle make. This could lead to a determination of value that does not represent the true retail price of your car.

Tax benefit for trading-in your car

However, the case is not always that bad. There are a few perks that come with the process. For example, sellers looking to trade in their cars in Massachusetts get to enjoy a tax benefit. Ideally, selling your vehicle to a dealer or private buyer shouldn’t be accompanied by a tax bill.

This is especially if you’re selling it at a lower price than you bought it. The Internal Revenue Services views personal cars as capital assets. Selling a car for a price less than what you actually paid for is considered a loss. The cash you make from it is all yours and is tax free.

The exception comes in when you want to sell your vehicle for more than what you paid for - as is it is the case with cars fitted with a lot of modifications or rare classic cars. The increased value attracts a capital gains tax that is charged on the profit made from the sale.

When it comes to a trade-in where you buy a new car as soon as you trade your old one at the same dealership, you get to enjoy sales tax benefits. This comes in the form of a trade-in tax exemption.

For example, if you negotiate the value of a new car and agree with the dealer to pay $40,000 for it, and trade in your old car valued at $15,000, you will be taxed on the difference of $25,000 instead of the full price of $40,000 for the new car.

The current sales tax charged in Massachusetts is 6.25% of the sale price of tangible personal property. In our example, you’d be required to pay ($25,000 x 0.0625) = $1562.50 in sales tax instead of ($40,000 x 0.0625) = $2,500. You get to enjoy $937.50 in tax savings.

Compare taxes charged on a new purchase vs a trade-in

When deciding to sell your car or trade it in, one of the steps you can take to determine what works for you is to compare the amount of tax you’ll pay. You can do this by following the steps below:

1. Visit your preferred car dealership and get a trade-in price for a new car as well as the purchase price if you were to buy it cash.

2. Determine the tax you’d be required to pay if you bought the new car using cash and without a trade-in. In our example above, we used the formula “Purchase price x 6.25% = Tax you will pay without a trade-in.”

3. Determine the tax you’d pay if you decide to trade in your car. That is, [(Purchase price – trade in price) x 6.25% = Taxable price with trade-in].

4. Calculate the tax savings you get from trading in your old car for a new one versus buying the new one with cash.

The result of your calculation helps you to decide whether to sell your old car privately and buy a new one, or to trade it in at a dealership.  

You can get a better value selling your car privately    

Remember that you can always get a better value for your car if you decide to sell it to a private buyer. At Boston Car Buyers, we will buy your car on the same day you bring it in. We pride ourselves in providing the best customer experience and making the process of selling your car smooth and effortless.

This is in addition to giving a fair cash quote. Whether you’re selling an SUV, truck, hatchback, or sedan, our agents will come to where you are, inspect your vehicle, and offer you a free quote.  You can also visit our offices at 186 Monsignor O’Brien Hwy. Cambridge, MA 02141 or call us on (617) 547-069 for more information.