The National Automobile Dealers Association reported in 2017 that 22% of vehicles sold are accompanied by a trade-in – an instance in which you sell your car in turn to the dealer in the process of buying a new one.
Trading-in your car can certainly make a lot of fundamental sense – after all, the whole purpose of buying a car is often to replace an older one. Yet what a lot of consumers don’t realize is that trading-in your vehicle can have significant financial and practical benefits as well.
This benefit primarily comes in the form of trade-in tax credits. Essentially, when trading-in your vehicle in the process of purchasing a new one, many states will allow you to pay sales tax only on the difference between the price of the new car, and the trade-in value of the old one.
Tax rates differ by state – as can be seen in Table A below, tax rates for states that charge a sales tax can range from 5% for Maine on the low end, to 11.73% in Arizona on the high end. This can represent considerable savings for luxury car buyers trading in a high-value vehicle; for example, in Arizona, you could save $11,730 on a vehicle with a $100,000 trade-in value.
Table A - Potential Tax Savings on Trade-In By State
(Assuming a trade-in value of $100,000)
|State||Maximum Tax Rate||Potential Savings|
In addition, trading in your vehicle can also allow you to mitigate the fundamental cost of separately selling your vehicle to a dealer. Selling your vehicle to a dealer typically is a trade-off between value and convenience – in exchange for the convenience of instantly purchasing your car, dealers will typically bake-in a certain amount of margin value for when they sell your car in turn.
When trading-in your vehicle for a new one, tax credits can make up some or even all of the cost incurred when selling your vehicle to a dealer. As can be seen in Exhibit B below, for a vehicle with a private retail value of $100,000, a dealer may charge 9.5% of value when purchasing your vehicle.
When accounting for a trade-in tax credit on a 10% sales tax rate, however, consumers can recover 10% of value in turn when trading-in their vehicle, allowing them to net 0.5% over private retail value in the aggregate. When combined with the inherent practical convenience of quickly selling your car to a dealer, trade-ins can therefore make for a best-of-both-worlds proposition in the right context!
Exhibit B - How Trade-Ins Mitigate the Financial Cost of Selling Your Car to a Dealer
(Assuming a vehicle private retail value of $100,000, a dealer sales margin of 9.5%, and an illustrative state sales tax rate of 10%)