Photo by Alexander Mils on Unsplash
Buying a car with cash is the ideal scenario for any vehicle purchase; it does not impact your credit, you don't have to worry about monthly payments, and it can save you money on finance charges you'd otherwise pay. That said, this strategy isn't for everyone, as cars are expensive purchases, and not everyone can afford to do so. There are also tax implications for buying a car with cash to consider.
Some might think that paying cash for a car carries a lot of weight and the salesperson will be more likely to offer a better deal since it'll be apparent that you're a serious buyer with deep pockets. But oftentimes, the inverse is true. The dealership would prefer that you take out a loan since the dealer's securing it for you nets it extra profit on the deal. With this in mind, here are some factors you need to consider when deciding whether to buy a car with cash.
- How to pay cash for a car
- Tax implications of buying a car with cash
- Pros and cons of buying a car with cash
- Is "never pay cash for a car" good advice?
How to pay cash for a car
It is relatively simple to buy a car with cash, as it makes the process significantly easier. The only things you need to worry about are the selling price of the car and the "out-the-door" price with taxes and fees included. If you were financing the car, however, you'd also need to pay attention to the interest rate (also called APR), length of the loan, down payment and monthly payment.
You'll likely pay with a cashier's check, certified check, bank draft or a wire transfer. Some dealerships may not accept personal checks over a certain dollar figure, so call ahead to see what the dealer's policy is. If the cash transaction is over $10,000, you'll need to produce certain forms of identification and the dealership will need to fill out a form to report it to the IRS (more on this later).
Another way to effectively pay cash for a car is to go through the process of financing with the dealership, which often leads to a better price. Make sure to verify before you sign that there are no prepayment penalties for paying the loan off sooner. Then, in roughly seven to 10 days when the bank has secured the loan, call the bank to get a buyout price and arrange a wire transfer to pay off the loan in full. There may be a small portion of interest charges to pay, but it should be offset by the better selling price you arranged.
Tax implications of buying a car with cash
The main tax implication of buying a car with cash has less to do with filing your taxes and more about reporting to the Internal Revenue Service. Cash payments that exceed $10,000 (or multiple related transactions involving more than $10,000) for a car require that the dealership report the transaction to the U.S. Treasury's Financial Crimes Enforcement Network (FinCEN), by filling out a joint document with the IRS called FinCEN 8300. The dealership must record the customer's name, address, date of birth, taxpayer ID number and occupation. The buyer needs to present a form of identification, such as a driver's license or passport, and the ID number will be recorded at that time. This is a provision that dates back to the Patriot Act, which was aimed at curtailing "money laundering, tax evasion, drug dealing, terrorist financing, and other criminal activities." Note that the IRS has different meanings for "cash" depending on the quantity and the type of payment method used. A cashier's check with a face value of $12,000 does not need to be reported by the dealership, for example, because the bank would have already reported it on its end.
One way that buying a car with cash directly affects your tax returns is that you cannot deduct the portion of your interest expense used for business since you never took out a loan. According to the IRS, if you are self-employed and use the car you're financing for your business, you can deduct that part of the interest expense that represents your business use of the car. That said, it is still possible to take tax deductions for the sales tax, mileage, depreciation, and other ownership expenses on a vehicle you paid cash for. Check with your tax preparer to see which deductions you're eligible for and how to claim them properly.