What happens if the cost of repair is more than the cost of the car?
Would you give it up or have it fixed?
This was the dilemma that my friend was facing. One of the car that he drives needed some repair but it turned out that it would cost him a lot of money to repair it. So he decided to give it up.
He actually has two options that he was contemplating on: donate it to charity or just sell it.
The Case About Donating The Car
When we were talking about it, he was thinking on donating the car to charity and get money back through tax deduction. However, I told him that he cannot really get a tax benefit unless he itemizes. In one of my old articles, I discussed about some of the huge mistakes people make just to get a huge tax deduction and I think he falls into this category. He is only donating the car for the sole purpose of the tax deduction and not to help charity (of course, the trickle effect would eventually be helping the charity). When getting rid of the car, donating the car is much faster and easier than selling it. But when the thought of not getting any money in return, he balked on the idea and would need to re-think what he needed to do.
Let’s pause for a little bit. Would he change his mind if he is actually getting money back??
In a heartbeat!!
For the sake of discussion let’s see how much would he get if he is actually itemizing his return and include the donation. Assuming that his car is worth $800 (fair market value) and he is in the 25% bracket, the tax benefit would be around $200. So, to him, $200 is a good deal and he will gladly donate the car even if he can sell the car at a much higher price.
The Case About Selling the Car
One of the reasons that he did not want to sell the car is because he thinks nobody will buy it because it is broken. In addition, he felt guilty for someone buying it knowing that it is broken.
If this is the only reason on why he didn’t want to sell, I told him that he should still try to sell it and just be honest with the condition as you’ll never know who’s going to be interested. Since the car was fixable and would run good again when repaired, he may be able to sell the car if the price is right, say $200 – the cost of the tax refund that he would have gotten had he donated the car if he were able to itemize. I told him that at that price, people with mechanical skills are willing to buy these kind of cars so they can fix it themselves and turn around and sell it for a profit.
This idea came about since I had the same dilemma more than a decade ago and I sold my car for around $300. At that time, I really needed the money and selling was the only option for me. Believe it or not, it was sold in five days. Turns out that the buyer was a mechanic and he’s been buying broken cars but very fixable and selling them for a profit. Â After a few weeks, I saw the same car being sold for around $1,500. Talk about “sweat profit” here.
Our Final Thoughts
At the end of the discussion, my advice was if he does not really need the money, I told him to just donate the car and just ignore the tax deduction. He currently donates money to church and not get a tax benefit so I told him to just treat it the same way. Besides, the dollar amount is not really a lot and he would be helping people in the process.