Taxpayer asks:
Earlier this year, I agreed to co-sign on a loan for my adult son for a new car so that he could get to work. He made the first payment and has not made payments since. I have made all of the other payments.
I have 2 questions:
Since I really bought the car, can I claim the deduction on new cars this year?
If I sell the car for less than I paid for it, can I claim a loss?
Thanks for your time.
Taxgirl says:
Okay, I’m going to make a pretty big assumption here. I’m going to guess that you merely co-signed on the loan for the car but your name is not on the title. Co-signing for a loan doesn’t give you ownership rights in the car, even if the primary signer defaults. That’s one of the tricky bits about co-signing. You’re guaranteeing the loan, not buying the car.
If you didn’t actually buy the car – meaning that you don’t own it – you would not be entitled to the new car sales tax deduction.
If you were to sue for ownership of the car (which I imagine that you’re not inclined to do), I still don’t think you’d qualify for the deduction. At that point, I don’t think you could argue that “the original use… commences with the taxpayer” which is the criteria for the deduction.
If, however, your name is on the title, then I think you would be entitled to half of the sales tax paid as a deduction. I haven’t seen any documentation on this yet but it would seem to me that if the car otherwise qualifies, and you own half of the car, you would be able to claim a portion of the deduction (if any of my colleagues have seen this matter addressed, by all means, chime in!). But I’m guessing that’s not the case here since co-signers rarely appear on the title and since you mentioned that your son made the first payment (it sounds like you meant for him to own the car outright).
And I’ve got more bad news: you can’t take a capital loss on the sale of the car, either. Even if you eventually take ownership of the car and sell it for a loss, there’s no capital loss treatment for the sale of “personal use property” – that includes houses and cars.
Perhaps you can save yourself some agita and work out a payment plan with your son to repay the money that you’ve paid on his behalf? I hope it all works out.
Before you go: be sure to read my disclaimer. Remember, I’m a lawyer and we love disclaimers.
If you have a question, here’s how to Ask The Taxgirl.
You may not want to own it especially if your son is still driving it in that you may be opening yourself to some liability. If he is unable to make the car payments, he may not be able to pay for car insurance either.