Questions about trade ins at dealerships (credit, buy, sell, Texas)

[family first]

So I floated this question a long time ago but not sure I got clarity on the answers. If I were to go buy a car at a dealership for $20,000. Negotiate a $5000 trade in for my used car, how does it work?

$20,000 - $5,000 net $15,000 then taxes, fees etc.... ending up around $18,000

OR

$20,000, taxes, fees etc.....ending up around $23,000 then they take the $5,000 off??????

Is this a black and white transaction or can the dealer go either way on this? If scenerio #2 they could be making some extra profits in there, couldn't they?

Anyone working at dealerships shed some light on this for me.

Thanks!

[jeffrow1]

Depends on the state you live in. Some tax on difference, others selling price. Dealer will be consistent with whatever is required.

[ukrkoz]

hmmm.. Aren't you ending at the same $18 000 anyway?

[jaypee]

I don't work at a dealership but I stayed at a Holiday Inn recently.
Think of the trade-in as a credit. Some states (like mine, California) tax you on the sale price of the new car. Some states tax you on the amount after the trade-in "credit" is taken. The dealer doesn't make money on taxes they collect.

[trbstang]

States are different in how they handle it, so look on your state's DMV or registration/title/licensing website for information. In Texas, you are only taxed on the net amount, so if your trade is $10K, and you buy a new car for $20K, you pay about 6% tax on $10K only.

[Hemlock140]

Wow, that would be nice. Here and where I lived before in CA the tax is on the price of the new vehicle, the trade is part of (or all of) the down payment on the balance of the price of the car plus the tax. There has even been talk of a tax change to require the tax on the sticker price even if you negotiate a lower deal!

[Checkered24]

In NY the trade is deducted before sales tax is computed. The theory is that you already paid sales tax on the equity value of the trade (I guess).

[crestliner]

You got understand that every dealer may use "methods" different from others. I know of a dealer who would spot people driving in with a car they might be wanting to trade in and then quickly tell them they will get several more thousand "in trade" than they figure their old car in worth. This gets them interested enough to come in and talk and the special low prices and discounts etc etc make them want to do business. Lets say a new car is advertised at a special 19k price ( sticker price is a jacked up 26k) When the closer at the dealer does his math they give you the big trade in allowance all right BUTS ITS DEDUCTED FROM THE FULL PRICE STICKER....They are at this point stealing your trade from you. Beware and never ever believe the sticker price is anywhere close to the value of the car or what they really sell it for....

[Mr.Cat]

The dealer WILL NOT lose money either way.

[greg42]

Originally Posted by ukrkoz

hmmm.. Aren't you ending at the same $18 000 anyway?

Well, the example in the beginning would not be correct. If the sales tax is calculated on the $20k, then we should be comparing a number that's, for example, $18,300 vs $18,000 if it is calculated on the $15k.

This shouldn't be any kind of either or. The state law should dictate which way it happens. As far as I know, most allow for deducting the trade value before calculating the sales tax, but some may not. It should be easy enough to look this up for the state in question.

The dealer will make profit on whatever you paid for the car over their final cost for it, whatever higher amount they get for your trade than they gave you and whatever BS fees you agree to pay them (not counting the actual license fee). Oh, and if you use whatever financing the dealer suggests, they'll make money on that too. They won't make money on scenario 2 any differently than scenario 1 as far as how the sales tax and trade are handled. The extra $300 or whatever would be due the state.