Gifting a car is a better option than selling it for $1 in California, since vehicles given as gifts aren’t subject to taxes.
So you want to give someone a car as a gift. You might have heard that it’s better to “sell” the car for a single dollar instead of giving it to the recipient outright. But will that really save you money on taxes—and is it better to just gift the car directly?
We’ll cover the ins and outs of car sales and gift taxes in the Golden State, along with a checklist for gifting a car.
Is it better to gift a car or sell it for a dollar in California?
If you’re trying to help out a family member who’s fallen on hard times or just surprise someone you love, it’s much better to gift a car than sell it for $1 in California.
What’s the difference between gifting a car and selling it for a single dollar, anyway? It comes down to taxes. When you sell a car, that sale is subject to the vehicle sales tax in your state. In California, the car sales tax is 7.25%—the third highest of any state! Combined with local taxes, the average car sales tax in the Golden State is actually closer to 9%, calculated based on the sale price.
Gifted cars, on the other hand, are often subject to a gift tax based on their fair market value. So, in theory, selling a car for $1 could save you a lot of money on taxes.
Not in California, though. Along with Florida, California is one of a few states that will waive taxes for car gifts. According to Chapter 4.035 of the Vehicle Industry Registration Procedures Manual from the Department of Motor Vehicles, cars given as gifts are exempt from use tax as long as the word “gift” appears on the back of the title and the applicant files a REG-256 Statement of Facts form with the DMV.
How gifting a car works in California
Want a more complete breakdown of the California car gifting process? Let’s get into it.
1. Pay off any outstanding loans
If you’re hoping to gift a used car to a friend or relative as a favor, the last thing you want to do is hand over outstanding debts along with it. Loans also make the title transfer process difficult, so it’s best to contact any lienholders to have the liens removed before making the gift official.
2. Negotiate the terms of the gift
This step might take some of the fun out if you’re gifting as a surprise, but it’s important not to skip it. Remember, car ownership involves much more than a single purchase price. When you gift a car to someone, you’re also giving them a set of ongoing costs, from insurance and maintenance fees to repair bills and gas.
Sit down with the recipient of the car and figure out who’s going to cover those costs, as well as the titling and registration fees involved in the gifting process. You should be prepared to account for a $15 title transfer fee, an $8 smog transfer fee, and a $64 vehicle registration fee. In addition, keep in mind these averages:
- Minimum liability insurance in California: $2,105 per year
- Full coverage insurance in California: $2,774 per year
- Vehicle maintenance costs in California: $1,186 to $1,282 per year
- Fuel costs in California: $1,500 to $2,000 per year
While all of these costs will vary depending on the type of vehicle you’re gifting, you’ll need to make a plan for paying all of them.
Learn more: Buying a car in California from out of state
3. Create a bill of sale
That’s right—you should still write a bill of sale for a gifted car. This document creates a legal record of the transaction, even though no money changed hands.
There’s no single required format for a California bill of sale—in fact, it’s not a legal requirement. But the DMV provides a sample bill of sale that you can download and fill out yourself, and it includes a space to indicate that the car is a gift.
If you’re creating your own bill of sale, the most important things to include are the make, model, year, and vehicle identification number (VIN) for the car, as well as the full names, addresses, and signatures of both yourself and the new owner. It’s also a good idea to include the date, odometer reading, and license plate number.
4. Transfer the car title
A bill of sale is important but not required—but transferring the vehicle title is absolutely essential. Without it, you won’t be able to legally transfer ownership, and you’ll still be fully responsible for the car.
To transfer the title, you’ll need one of two key documents: either the actual vehicle title, or an Application for Replacement or Transfer of Title (REG-227). If you’ve got the original title (or a replacement), fill out the back and be sure to write “GIFT” in lieu of a purchase price. If you don’t have the title, fill out the REG-227 and check the appropriate box to indicate that it’s a gift.
5. Fill out a Statement of Facts to avoid sales tax
Unless you want to pay taxes on the gifted car, you’ll need to file a Statement of Facts (REG-256) with your local DMV. This affidavit allows you to claim the tax exemption for a car gifted to a private party. It’s also possible to apply for a tax exemption for any vehicle transfer between family members, defined by California law as:
- Spouse
- Domestic partner
- Parents
- Sons and daughters
- Grandparents
- Grandchildren
Your niece, nephew, and cousin don’t count as “family members” for the purposes of car use tax exemption unless you check the box to indicate that the transfer is a gift. Some exclusions may also apply if you’re gifting the car to a business or business owner.
6. Purchase insurance
Before the gift can be finalized, your giftee will need to provide proof of insurance that meets California’s minimum requirements. If they already have car insurance, this could be as simple as contacting their insurance company to add a new car to their policy.
But depending on the value of the car, its safety ratings, and other factors, their insurance rate could rise as a result of the gift. That’s why it’s a good idea to compare car insurance quotes and switch to a lower rate.
What to keep in mind when gifting a car in California
Gifting a car instead of selling it for $1 in California can save you a lot of hassle—and some tax money! But there are a few things to keep in mind if you’re considering this world-class gift.
- If you want to give a brand-new car to a family member rather than a used vehicle, it’s better to bring the recipient to the dealership with you and make them a part of the car-buying process.
- A car makes a great gift for a teen who just got their driver’s license—but prepare for sky-high insurance premiums.
- To leave a car to a family member or friend as part of an inheritance, you’ll need to list the vehicle in your will. The recipient will take ownership using an Affidavit for Transfer without Probate (REG-5).
FAQ
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Do I have to pay sales tax on a gifted car in CA?
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How much does it cost to transfer a car title in California as a gift?
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Licensed Insurance Agent
R.E. Fulton is an expert insurance writer specializing in car ownership topics from car shopping and loan advice to insurance and repair guides. R.E.’s mission is to create unique and accessible content that helps readers to become more successful and independent car owners. R.E. has written and edited over 900 high-performing articles for Jerry, with an average of 1 million+ views. As a senior writer on Jerry’s editorial team, R.E. draws on over 10 years of experience as a professional writer and digital publishing specialist. Prior to joining Jerry’s editorial team in 2021, R.E. worked as a writing coach at Columbia University, the Rochester Institute of Technology (RIT), and the University of Rochester. They serve as a managing editor for peer-reviewed history publication Nursing Clio, where their work has appeared regularly since 2015.
Kathleen Flear is an expert insurance writer and editor who previously lead up Jerry’s editorial team as director of content. Kathleen empowers drivers to make smart car ownership decisions through best-in-class articles on insurance, loans, and maintenance. Prior to joining Jerry in 2021, Kathleen served as managing editor for a team of SEO content marketing professionals at Article-Writing.co and worked as a freelance writer and editor for a range of digital publications, including Chicago Literati magazine and Golden Words. She earned a bachelor’s degree in English language and literature from Queen’s University, and a master’s degree in creative writing and fiction from Sierra Nevada University.
