Trade In Tax Credit | Car Sales Explained

Specialized terminology can complicate your car shopping journey. At Alfa Romeo of Seattle, we aim to provide clarity by helping our customers find vehicles that meet their needs, budget, and style, with a comprehensive shopping experience, product information and sales process. 

Let’s talk: trade tax credit 

A trade tax credit may be applied when you are trading in your car toward a purchase or lease of a new or used. It must be of a “like to like” category as defined by the Washington State Department of Internal Revenue; a vehicle for a vehicle and not a trailer for a vehicle or RV for a vehicle. 

The trade in value (trade in allowance) will be an agreed-upon amount between the dealership and the customer and will be clearly identified on the sales agreement. This value will not be lowered by outstanding balances owed to a lien holder. 

The trade in tax credit amount can be calculated as the Trade Allowance multiplied by the Sales Tax Rate.  $25,000 x 10.5% = $2,625 trade tax credit. 

Think of it this way; if you originally bought your trade in vehicle for $50,000, you may have paid $5,250 in sales tax using 10.5%. As you are “giving up” some of that original value, the state is allowing you to get back some of sales tax you paid. 

How your deal is structured will affect where and how the tax credit is applied. The examples below will use a trade in value that is lower than the selling price, but there are rules in place if the trade in value is higher than the selling price. We used a flat number for the selling price and trade allowance for ease of understanding and the current Bellevue/Washington State vehicle sales tax of 10.5%. 

Purchase – Cash or Finance: 

1. The trade in vehicle has an agreed upon value of $25,000 toward the purchase of a new $40,000 vehicle. Instead of $4,200 of sales tax, your tax is reduced by the $2,625 sales tax credit and would be $1,575. 
2. The trade in vehicle has an agreed upon value of $25,000 with a loan balance of $5,000 owed toward the purchase of a new $40,000 vehicle. The trade in value remains at $25,000, and the sales tax credit of $2,625 is still valid. 

Lease: 

1. The dealer leases a vehicle to you through a leasing company for 36 months at $600 per month. You have a trade in vehicle with an agreed upon value of $25,000 and an outstanding loan balance of $15,000. You now have a $2,625 sales tax credit (10.5% of $25,000). 
2. Your monthly payment of $600 includes $90 per month in Monthly Sales/Use Tax.  
3. You take the sales tax credit and spread it equally across the term to credit the Monthly Use Tax, until the credit is gone. 
4. In this example, for 29 months ($2,625 sales tax credit divided by $90 tax due equals 29 months) of your lease, your payment would be minus use tax and amount to $510. For the remaining 7 months, your payment is with tax at $600. 
5. Please note that if you trade in a leased vehicle, you will not get a sales tax credit. You must have financed the vehicle to get the use tax credit. 

Examples given are not representative of active offers. Please visit our New Vehicle Specials for up to date offers and conditions, and use our Value Your Trade tool to work with our Alfa Romeo of Seattle sales team to provide a trade in value. 

Sources:
https://dor.wa.gov/education/industry-guides/auto-dealers/trade-ins