Gifting a car

Many of our readers are in the fortunate position where you may want to buy a car for your child. If you wish to finance the purchase because you can get a loan at a lower rate than expected returns in the stock market, you might consider getting the loan in your own name if your child doesn’t qualify for an auto loan, with the intention of signing the title over afterwards.

However, be aware that you cannot gift a car if you do not outright own it. That means if you have a loan on the car, you will have to pay that loan off in full in order to gift the car. Said another way, you can only sign title over for the car if you own it free and clear.

So, if you won’t be paying off the loan and the recipient won’t be assuming the loan or taking out a new loan to pay off your existing loan, can you still gift it? Well, yes and no.

Yes because you can allow your child to drive the car without having her name on the title. However, keep in mind you would still be legally responsible for the loan payments as well as any parking tickets or red light camera tickets, etc. If you want to take it a step further, you can even add your child’s name to the title if you’re either in a state where you possess the title or if the lender allows it (processes vary by state, so check with your locality’s motor vehicle authority). If this is the case, then you would both be on the title and you would both be legally liable for any fines or penalties incurred by the driver.

No because, well, you can’t get rid of the loan if you don’t pay it off by either coming out of pocket yourself or having someone else pay it off for you… So if you want to achieve the end of allowing your child to be the sole party legally responsible, then you’re out of luck.

If you do own the car outright, then things become clearer. You would simply have to contact your local motor vehicle authority to ascertain their procedures for changing title. In some states, a gift to certain family members, including a child, can be done without incurring sales or excise tax. In others, however, tax may be based on the current used car value. Again, check with your state to see what is required. Don’t forget to file a gift tax form if the value of the car is over the annual exemption!