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Buying someone a vehicle can seem like the ultimate gift, but when you're gifting something as expensive and complex as car ownership, there are some important things to keep in mind before you get started.
Here are some steps to consider before you decide to buy a loved one such a significant gift.
1. Consider Your Giftee's Financial Situation
Buying a car for someone else is an expensive gift on its own, but the cost of car ownership goes far beyond the sales price of the vehicle. Your giftee will need to cover the following expenses:
- Fuel
- Insurance
- Maintenance
- Repairs
- Annual registration
Each year, the cost of owning a vehicle can climb into the thousands of dollars, so it's important to understand whether your loved one can afford those expenses before you make your decision.
While you may want the gift to be a surprise, it may be wise to have a conversation with the giftee, so they're aware of the financial responsibilities they'll have.
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2. Understand Financing Options
If you're planning to finance the vehicle purchase, keep in mind that you likely won't be able to get an auto loan unless you plan to put your name on the title as a co-owner of the vehicle. It wouldn't be necessary to also put your name on the vehicle registration or insurance policy, however.
Alternatively, you can buy the car with cash or have the giftee apply for the loan and cosign the application. You can then opt to take over payments once the loan has been funded.
To make things simpler, you may consider buying the car with cash. But whether you're planning to buy the car outright or finance it with an auto loan, think about how the cost will impact your ability to manage other financial obligations and goals.
3. Understand Title Requirements
Each state has its own laws regarding how to manage a vehicle title. If you're gifting a car, for instance, you may not be able to add the giftee's name to the title without them signing off on it. In some cases, you can convince a dealer to handle the title paperwork after you've delivered the gift car, but make sure you communicate with the dealer early on in the process to understand your options.
If you're planning to put both of your names on the title, consider using "or" or "and/or" instead of "and" between your names so that only one party is required to sign the title when buying or selling the vehicle. Again, talk to the dealer about the best course of action.
4. Figure Out Insurance
Whether you're financing the vehicle or buying it with cash, you'll typically need proof of insurance to complete the sale. If you're planning to cover insurance premiums, you can simply add the vehicle to your existing policy.
However, if the giftee will be getting their own insurance policy, you may need to temporarily add the vehicle to your policy or ask your insurance agent to provide a verbal or written binder, which means that the vehicle is covered, but a policy hasn't been issued—depending on your insurance carrier, you may have 14 to 30 days to report a new car purchase, which could give you a bit of leeway.
5. Remember Taxes
In addition to sales tax on the vehicle, you may also be subject to the gift tax exclusion. In 2023, you can give up to $17,000 (or $34,000 as a married couple) to another individual without reporting it to the IRS at tax time.
That doesn't mean you have to pay taxes on the gift, however—the gift tax is designed primarily for incredibly wealthy taxpayers. Any value over the annual gift tax exclusion gets counted toward your lifetime exclusion, and if you surpass that, you'll have to pay taxes. In 2023, the lifetime exclusion is $12.92 million (or $25.84 million for married couples), so most people will likely only need to deal with the inconvenience of an additional form on their tax return.
The Bottom Line
Buying a car as a gift can be the ultimate present, but it's important to understand that some aspects of the process will differ compared to buying a vehicle for yourself. Take your time to understand the specific laws and logistics for your state, and don't be afraid to consult with a local dealer who has likely worked with similar situations in the past.
If you're considering buying an insurance policy for the vehicle, or you want to make sure you're getting the best rate on your current policy, you can use Experian Insurance Services to shop around and compare rates to determine whether you can save.