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Gifting a car in Texas

is likely a better idea than selling it to someone for $1 if the recipient is an eligible relative. If you sell a car for $1 or you gift a car to a non-relative, the recipient will have to pay sales tax on the vehicle’s actual market value, not the single dollar you sold it for.

So you’re feeling charitable and are ready to hand off the ol’ Econoline to one of your kids? You might have heard through the grapevine that it’s a better idea to sell the car for $1 than to gift it outright. But which method will save you more money in the long run in Texas?

We’ll go over the details of gift taxes and sales taxes in Texas, along with everything else you’ll need for gifting a vehicle from prerequisites to

car insurance

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Is it better to gift a car or sell it for a dollar in Texas?

If you’re helping a family member out or want to surprise one of your kids before they head off to college,

gifting a car to a relative

is a much better idea than selling the car for $1 in Texas.

Is there really a difference between gifting a car and selling it for a dollar? In Texas, you bet there is—taxes!

Whenever you sell a vehicle in Texas, that sale is subject to a 6.25% sales tax. And no, the Texas sales tax does not apply to the $1 the car was sold for—the sales tax is based on the

car’s fair market value

. This means that even if you sell a car in Texas for $1, you could end up paying hundreds of dollars in taxes.

If you gift a car to a friend or colleague, the recipient will also have to pay sales tax on the gifted car. However, gifted cars to eligible relatives are subject to a $10 gift tax instead of sales tax.

Texas will waive the sales tax on a car gifted to one of the following eligible family members:

Spouses

Parents

Step-parents

Siblings

Grandparents

Grandchildren

Children

Step-kids

Legal guardians

How gifting a car works in Texas

Here’s a comprehensive list of how to gift a car in Texas!

1. Pay off any outstanding loans

If you’re gifting a car to a relative, you’ll want to pay off any outstanding

car loans

that may still be on the vehicle. If there is still a lien on the car you plan to gift, contact the lien holder to resolve the loan before you gift the car.

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2. Negotiate the terms of the gift

Even with a gifted car, there will be costs to pay once the vehicle changes hands. You’ll want to ensure that you and the recipient are clear in advance on who will be taking care of the vehicle’s maintenance, repair bills, fuel costs, and insurance.

Figure out who will be responsible for those costs with the recipients. Numerous fees will also need to be accounted for, including the title transfer fee ($28 to $33 depending on the county), the smog test fee (no more than $30.75 depending on the year of the vehicle), and the registration fee ($51.75). You’ll also want to ensure the giftee is aware of the average costs a vehicle requires in Texas:

Minimum liability insurance in Texas: $1,955 per year

Full coverage insurance in Texas: $2,545 per year

Vehicle maintenance costs in Texas: between $948 and $2,523

These costs will vary depending on the vehicle and where it will be driven, but they need to be accounted for before the car is gifted.

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3. Create a bill of sale

Even if the car is a gift (to a relative or someone else), you’ll need to create a

bill of sale

—the bill of sale becomes a legal record of the transaction, even if no money is paid for the vehicle. The bill of sale will legally absolve you of responsibility once the car has been gifted. It also will notify the Texas DMV that ownership of the car has been transferred.

When drafting a bill of sale, certain details must be included in it:

Make and model of vehicle being gifted

Vehicle identification number (VIN)

Current odometer reading

License plate number

Date of transfer

Gift value

Sales tax

Personal information of both gifter and recipient

Signatures of both gift giver and recipient

4. Transfer the car title

The

transferring of the title

is the most important step in the gifting process—this process is very similar to the process of transferring a title when selling a car in Texas.

To start the title transfer, both the gifter and recipient will need need to visit your

local Texas county tax office

, and do the following:

Furnish A completed

Texas Certificate of Title

Ensure the release of any liens on the vehicle or power of attorney, if necessary

All required fees and taxes are paid

When a car is being gifted, the gift recipient or “buyer” is responsible for ensuring the title transfer goes through. The giftee, or “seller” is only required to provide the following:

The current title signed over to the gift recipient (write “0” for the price of the gifted vehicle)

The current odometer reading

A signed Application for Texas Certificate of Titl

MORE:

Title transfer in Texas

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5. Fill out an Affidavit of Motor Vehicle Gift Transfer Form

A Texas

Affidavit of Motor Vehicle Gift Transfer Form

will have to be filled out for an eligible relative to be able to pay the $10 gift tax in lieu of paying sales tax on a gifted var. The Affidavit acknowledges that no money exchanged hands in the gifting of a vehicle.

6. Purchase insurance

Before the gifting of the car is complete, the recipient must meet

Texas’ minimum liability insurance requirements

. However, if they already carry car insurance, the gifted car can simply be added to their current policy.

That said, numerous factors may cause the recipient’s insurance rate to spike, including the gifted vehicle’s safety ratings, the car’s overall value, the recipient’s driving record, and other factors. This is why it's always a good idea to shop around to find the most robust policy possible at an affordable price.

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How to find temporary car insurance in Texas

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What to keep in mind when gifting a car in Texas

Gifting a car to an eligible relative in Texas will save you more money than selling it to that relative for $1. Here are some other things to keep in mind if you’re gifting a car to a relative:

If you’re gifting a new (as opposed to a used car) to a relative, it’s a good idea to bring them to the dealership and make them a part of the buying process.

If you’re gifting a vehicle to a

teenage driver

, be prepared for the teen to face very high premiums (as young drivers are expensive to insure).

If you want to leave a car as a gift to a relative after you pass away, the vehicle must be listed in your will, and an

Affidavit of Heirship for a Motor Vehicle

must be filled out.

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FAQs

Do I have to pay sales tax on a gifted car in TX?

Eligible relatives receiving a gift car in Texas can pay a $10 Gift Tax (along with all other fees) in lieu of sales tax. If you’re not an eligible relative, you’ll have to pay sales tax on the gifted vehicle.

How much does it cost to transfer a car title in Texas as a gift?

It costs between $28 to $33 (depending on the county) to transfer a title in Texas as a gift.