5 Things You Should Consider Before Giving A Car As A Gift

A car is an essential part of modern life because it makes getting around so much easier. If you've decided to gift someone a car, whether it's to help a family member, fulfill someone's dream, or pass along your old vehicle after an upgrade, it's undeniably a special gesture. However, there's more to it than just handing over the keys and seeing the excitement on their face. There are important financial, legal, and practical responsibilities to consider before making this decision.

Sure, choosing the perfect car, its model, color, and features is pretty important to the process. But the reality is that gifting a car involves a lot of behind-the-scenes planning. From making sure the car is in good condition to properly transferring the title and ensuring they can handle ongoing costs like insurance and maintenance, there's plenty to think about. Without careful planning, what starts as a thoughtful gesture could quickly turn into a decision to regret, both for you and the recipient.

In this guide, we'll explore all the key factors to consider before giving someone a car. From the financial implications to the practical details, after all, the goal is to give a gift that genuinely improves their day-to-day life, not one that creates unnecessary burdens or complications down the road.

When you're giving someone a car, one important decision to make is whose name should go on the title. It might seem simple, but this choice has serious legal and financial implications. The car title is the document that proves who owns the vehicle, so getting this right is pretty important. You generally have two options: either buy the car in your name and then transfer the title to the recipient, or purchase the car directly in their name. Each option has its pros and cons, so it's important to think it through carefully.

If you put the car title in your name first, you'll need to transfer ownership later. This means extra paperwork and possibly additional fees. However, it gives you more control over the process and ensures everything is set up the way you want. On the other hand, buying the car directly in the recipient's name simplifies things but requires their involvement from the start. You'll need to coordinate with them on the paperwork and make sure they have the necessary documents. That approach, however, takes away the element of surprise.

Whichever way you choose to approach this, keep in mind that title transfer laws can vary depending on your state. Some states may have specific requirements or restrictions when it comes to gifting a car. It's a good idea to check with your local Department of Motor Vehicles (DMV) to know exactly what you need to do. Remember, the person whose name is on the title is legally responsible for the car. This includes things like accidents, parking tickets, and other legal issues. Make sure both you and the recipient fully understand these responsibilities before completing the transfer.

Taxes are very important, yet they are often overlooked when gifting a car. Tax considerations go beyond the initial purchase price, and understanding these implications can help you avoid financial surprises. So, both you, the gift giver, and the recipient need to be aware of the tax obligations that come with this gesture.

The first thing to know is that most states require you to pay sales tax or gift tax when transferring ownership, even if the car is a gift. You might assume that gifting a car lets you skip sales tax, but that's not always true. Each state has its own rules for calculating these taxes and deciding who pays them. Some states base the tax on the car's current market value, while others have their formulas to figure out the tax amount.

It's also important to know about federal gift tax implications. As of 2024, you can gift up to $18,000 per person in a year without reporting it to the IRS. However, if the car's value is higher than that, you'll need to file a gift tax return, even if no tax is owed. This doesn't mean you'll definitely pay a gift tax, but it does mean you're required to report the gift.

For the recipient, getting a car as a gift could impact their taxes, too. While they usually won't owe income tax on the gifted car, they should keep detailed records of the transfer. This includes paperwork showing it was a gift. These records will be essential if they ever sell the car, as they'll need them to figure out their cost basis for capital gains tax. It's a good idea to consult a tax professional for more guidance before giving the car.

Before giving someone a car, it's important to think about the vehicle's condition and whether it fits their lifestyle. A car that needs constant repairs or doesn't suit the person's daily needs can quickly turn a thoughtful gift into a problem. If you're considering a used car, have a trusted mechanic inspect it thoroughly to spot any potential issues that could lead to expensive repairs later on.

Also, consider how the car fits into the recipient's routine. Someone who commutes long distances might really just need a fuel-efficient, reliable car, while a parent with young kids might need a vehicle with advanced safety features and plenty of space for car seats and gear. The goal is to give them a car that makes their life easier, not more complicated.

There are several other factors to consider. For starters, think about the car's size and how it fits into their parking situation, especially if they live in a crowded city where space is limited. Think about the local weather conditions, too, and how that might affect the car. Does the car have all-wheel drive or other features that make it reliable in snow, rain, or heat?

Even small details can make a big difference. If they often travel with pets, cloth seats might be a better choice than leather, which can scratch easily. For some drivers, a compact car might be more practical than a large SUV. And don't forget about transmission, as there are pros and cons of an automatic versus a manual. When you take the time to choose a car with their needs in mind, it shows you care and makes the gift much more memorable.

As much as it might feel awkward, this is an important question to answer before giving someone a car. You need to think about whether the person can handle the ongoing costs of owning it. Even if you're paying for the car itself, owning a car involves recurring expenses that could put a strain on their monthly budget. Let's go over the main costs they'll need to manage.

Insurance is a non-negotiable expense that can vary based on factors like the recipient's age, driving history, location, and the type of car. A luxury vehicle or classic car might come with premium insurance rates that could strain their budget. It's a good idea to get an insurance quote before making the purchase to avoid any unpleasant surprises.

Furthermore, regular maintenance isn't just about oil changes. It includes tire rotations, brake services, fluid replacements, and addressing routine wear and tear. The cost of upkeep can vary depending on the car's make and model. A high-end vehicle might require premium parts and specialized servicing, which can be significantly more expensive than maintaining a more common model. 

Then, there are unexpected repairs that come with owning any car. Even reliable cars break down sometimes, and repairs like a bad alternator or transmission can be costly. It's important to think about whether they can afford surprise expenses like these. While you may want to surprise them with something so useful, you also don't want to risk putting someone in a difficult financial position.

If you are on the fence on whether to give a car as a gift, don't worry because there are other thoughtful options that could serve both you and the intended recipient better. For example, helping them with their current car expenses might be more useful than gifting a new one. If they already have a reliable car but struggle with maintenance or insurance costs, offering to cover these expenses for a period could provide much-needed financial relief. Another option is starting a car fund. Instead of giving them a car now, you could set up a savings account or add to their existing car fund. This way, they can take part in the car-buying process, and when the time is right, they are able to choose exactly what suits their needs and preferences.

Alternatively, if financing is the problem, consider co-signing a loan. For someone without strong credit or enough credit history, this could make a big difference. However, co-signing means you're legally responsible for the loan if they stop making payments, so only do this if you are confident in their ability to handle the financial commitment. And if timing is the issue, let's say they're planning a big move soon; consider holding off until the timing is right. If you decide to explore other options, focus on the reason behind your original idea, which is to help with their transportation needs. Have an honest conversation about what would be most useful for them right now. They might have preferences or ideas you hadn't considered, and working together could lead to an even better solution.