I'm planning on getting rid of my '02 BMW for a new truck. I still owe $38,000 on it. Private retail is $41,000 (I doubt I could get more than $38-39,000) and trade in is $36,000.

Is it correct that trade ins decrease the sales tax? So if I get $36,000 trade in on a $45,000 truck, I pay tax on only $9000. If so, then I guess it is worth it to trade in and get less for the car than you could on private market.

Another question - since I owe so much against the car, is this even feasible? How would I pay off the car loan, since I have so little equity in it?

I'm assuming that I just have to sell the car, and not even consider a trade in, but I was just wondering if there is some paperwork way around this - trade the car in, pay less tax, and then pay off the car loan with a new one?

 

State tax laws vary, but here in NY it's just as you stated: $45000 less $36000 would leave a TAXABLE difference of $9000, so you definitely need to factor that in if you were to try to sell it outright. In my 8.5% county, I would have to get more than $38970 for that car before selling it on my own became worthwhile.

As for what you owe, it's merely added to your new loan. Take your example: $9000 plus tax (let's say it's 6%) plus title and tags ($200?) equals $9740, plus $38000 leaves an amount to finance of $47,740. From there you would subtract any rebates or cash down.

 

IMHO…what I’m about to suggest, you may not like or agree with, but I hate owing money. We work too hard to give that monthly payment to the car loan guy than to ourselves.

If your beemer is in A1 condition, and you can afford the 38K “Mortgage”, I’d run it till it had zero dollars worth of value, “because the cost per mile” is a very pretty penny for a three year old car.

If you calculated the cost to you when you bought the car and now the cost it is to sell it, then the cost of the new truck, then the cost it would be to sell that in three years (hypothetically), you would find that you could have used that money as a nice down payment on a piece of land instead of giving it to a car dealer and the bank guy – (sorry Jeff).

Now if you could calculate that by trading in your beemer you would have a lower Cost of Ownership over x many years, than maybe financially, would be beneficial, thus a good thing to do. However, this would be highly unlikely because of the lack of equity within the Beemer and the ton of finance charges and depreciation on both the front and back end. (Now if you traded it in on one of those electric cars - High gas mileage, Tax Credits, and potentially lower insurance costs – Just kidding)

To answer your other question, in PA they do offset, so taxes would be based from the adjusted asset price. And also, some dealerships will do a “wash” sell, in that if you closed both transactions at the same time with the dealership, they can wash through your outright as a trade. But Jeff made a good point that in NY, they have a lemon law that states that they have to give a warranty, so that tells me that every state may treat this differently.

I feel your pain though, ‘cause I love to have a new vehicle every three or four years, but I’ve learned my lesson as a young man that I was throwing away a ton of money to the dealership in trading my 2 year old vehicles in for a shiny new one.

And nowadays, they sell that new car smell in a bottle, so that does offer a little comfort in keeping the paid off vehicle instead of feeding my eyes with a new one.

Buy what you need, not just what you want and run it until you can justify a change.

(And all this goes out the window if the wife one day out of the blue says "go get your truck..." and try not to run too many red lights on your way )

 

Thanks Jeff. I'm in IL - so will have to see how this state's tax laws work. My car is an '02 540i 6 speed with various options, only 13,000 miles, and under warrenty for another year and 1/2. I'm planning on an F250 SCREW Lariat 6.0 with a few options. Is it true that in a trade in situation like this to get $36,000 trade (just from internet KBB) that I would be expected to pay full sticker for the truck? If so, then selling it may still be the better option - pay $3000 more in taxes, but save $4000 off sticker, to get closer to invoyce price.

 

Out of curiosity what model of BMW do you own?

 

It's an '02 540i. 290 HP with a 6 speed manual - fast, and a lot of fun to drive, but not so fun for me to get in and out of. Cost around $54,000 new, I just bought it used this spring.

 

The thing is if you know what you can afford (total & monthly) and you are top heavy(still owe) then you can work the new truck price to fit into what you can get a loan for. Typically lenders can finance up to 130%. You will need to purchase Gap insurance (to protect the new truck in case of an accident) because you will end up owing more than the truck will be worth. Now they can reduce the sticker to cover what your top heavy on if you know someone at a dealer. Chances are they will not go too low, but the $3K you are over is not too much. They may come down a couple grand on the sticker then you will only have to finance $1K more than that to cover the difference from what they will give you for the BMW vs. what you owe.

There is usually more profit in the sticker on a used vehicle and it may be possible for them to reduce the sticker on a used vehicle to cover how top heavy you are.

You can gop to the dealer and talk sticker price w/o them ever knowing you even have a trade in. Don't tell them you want to trade in. They will ask, and say you are not sure or you are going to try and have cash down, but don't know how much. Agree on a sticker then get financing.

I am working on a deal to get out of a gasser into a Diesel and am $7K top heavy on trade in value. I know what I can afford in payment (gets me to right around what the used truck I am looking at is stickered at. I ended up getting the dealer to reduce the sticker by $2K to make up some of the top heavy, then financed 130% to cover the top heavy amount ($5K) and tax liscense and gap. I am now closer to what the vehcile Blue Books at than I was before, but still have financed more than the truck is worth. Works for me, but not for everyone.

Good Luck.