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 and some tips to help you lower your

California car insurance costs

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.

MORE:

How to pay off your car loan faster

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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.

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.

You and your giftee should both sign the title. That document makes them the legal owner of the vehicle and absolves you from financial responsibility.

MORE:

California replacement title

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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.

MORE:

Penalties for driving without insurance in California

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)