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My car got totaled by my insurance company and I will get a check for about $8500. I plan to give that my money to my sister and take her car. My sister plans to buy a new car with that amount as a down payment.

Will the money I get from the insurance company be taxable? What is the best way in regards to taxes to give this money to my sister and she paying it to the dealership? What should I and my sister mention about this in the taxes?

I think I have the following options

  • Cash the check and give the money to my sister and she pays the cash to the dealership. - Is this a fine option and will the dealership accept cash?
  • Deposit the check, then write a check to my sister and she write a check to the dealership. - This process looks like the right one to me but takes some time and she plans to buy it soon
  • I have taken around 3500$ from my sister over the years for personal expenses. Should I give the money as repaying that amount and my sister give me her car a a gift as mentioned here so that it is tax exempt?

Please let me know if there are other better options than the ones mentioned above.

  • I don't understand how your three bullet points relate to the issue of whether the insurance money is taxable. – BrenBarn Jun 3 '15 at 15:44
  • @BrenBarn Thanks for pointing that out. They are different questions. Fixed it. – Ram Jun 3 '15 at 15:48
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    Google is your friend. Searching on "Michigan selling car to family member" (without quotes) turned up this pdf and a government web page about it. No time to make a true answer; if someone else wants to, go right ahead! – mkennedy Jun 3 '15 at 17:24
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In general, insurance payouts you receive in compensation for damage to your vehicle are not taxable income (see for instance this Nolo page).

However, I don't see how that is related to your three bullet points about how your sister should buy her car. You can transfer the money to her in any way that's convenient to both of you. Whether the dealership will accept cash is something you'll have to ask them about, but my impression is most dealers are eager to accept cash.

As long as the car you are getting from her is not worth substantially more than the $8500 you're giving her, I don't see that you'll be in trouble income-tax-wise. As mentioned in the question you linked to, you can give each other up to $14k per year tax-free. So if you give her a $8500 and she gives you a car worth roughly the same amount, no problem. If you actually do it as a sale, even better, since then the only amount that will count as a gift to either of you is whatever one party gets above and beyond the fair value of the car. (That is, if the car is worth $10000 but she sells it to you for $8500, she effectively gave you a gift of $1500 in car value. If it's worth $7000 but she sells it to you for $8500, you gave her a gift of $1500 in cash.)

As Rocky pointed out in a comment, if you do a sale it may be subject to sales tax depending on what state you're in. In practice it is very common for people to not deal with sales tax in informal transactions like this between family members, but you do owe it if your state's laws require it, and the state could theoretically come after you for it.

Another edit: I see from your comment you are in Michigan. According to this page from the Michigan Secretary of State, "no tax is due if you purchase a vehicle from an immediate family member". So you would not owe sales tax if you do it as a sale.

  • A sale would incur sales tax in most states – Rocky Jun 3 '15 at 16:24
  • Thanks for the detailed answer. I meant to ask them as unrelated questions. Please feel free to fix anything ambiguous with the question. Her car is roughly worth around $10,000. Can you please clarify on last thing? If I do it as an sale with her would she have to pay taxes to IRS for the money I give her for the car? – Ram Jun 3 '15 at 16:31
  • @Rocky So is it better to give each other as gifts or will it be obvious that it is a sale? Where can I find more information about the sales tax and their percentages in this case? The state here is Michigan. – Ram Jun 3 '15 at 16:36
  • @Ram: If you do it as a sale, she would be selling you a $10,000 vehicle for $8,500, so in theory she could actually claim a loss on her tax return. In practice as Bishop says it is probably easier to just do it as a gift if you're not going to give each other more gifts, since that way you don't have to worry about reporting gains and losses. – BrenBarn Jun 3 '15 at 18:54

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