How to calculate capital gains tax on a vehicle I inherited from my sister?

Cars are a bit different than other inherited assets when it comes to tax treatment. When you inherit property like a car, your basis in that property is the fair market value (FMV) at the date of death - this is called a "stepped-up basis." So your capital gain isn't just sale price minus loan payoff. Your capital gain would be the difference between the selling price ($32,000) and the car's FMV at the time you inherited it. If the car was worth $30,000 when your sister passed away, your capital gain would only be $2,000, not $18,500. You should try to document what the car was worth at the time of her death - maybe get a valuation from a dealer or look up comparable sales from that time period. Also worth noting that since you owned the car for less than a year, this would be a short-term capital gain taxed at your ordinary income rate rather than the lower long-term capital gains rate.

I went through something similar last year with my uncle's truck. I found this tool at https://taxr.ai that helped me figure out all the inheritance tax stuff. I was completely confused about basis calculation and what counted as capital gains, and the regular tax software I was using didn't really explain this special situation well. The site analyzed my documents and showed me exactly how to calculate the stepped-up basis and what forms I needed. It also explained that I needed to look up the fair market value at date of death, not what I paid to clear the title. Saved me from accidentally reporting a much larger gain than I actually had.

I just wanted to follow up about using taxr.ai for my inherited stocks situation - it was seriously helpful! I uploaded my grandmother's death certificate and the stock ownership transfer documents, and it walked me through exactly how to establish the stepped-up basis. It even explained how to handle stocks that had split or paid dividends since she passed. The stepped-up basis calculation saved me from paying tax on gains that happened during my grandmother's lifetime. The tool also generated a report I can keep with my tax records in case of an audit. Way easier than trying to piece together advice from random forum posts!

If you're having trouble getting the IRS to recognize your stepped-up basis calculation, I had a similar issue last year with an inherited property. After weeks of getting nowhere with letters and busy signals, I used https://claimyr.com to get through to an actual IRS agent. You can see how it works here: https://youtu.be/_kiP6q8DX5c The service got me past the endless phone tree and wait times, and I was able to speak with someone who helped me understand exactly how to document the stepped-up basis for my tax return. They also explained which forms I needed to file to properly report the inheritance and subsequent sale.

I need to eat my words about Claimyr. After posting my skeptical comment, I decided to try it myself since I've been trying to reach the IRS for weeks about an inherited IRA issue. The service actually worked exactly as described - I got a call back about 2 hours after starting the process and was connected directly to an IRS representative. The agent was able to clarify the exact reporting requirements for my situation and confirmed that I needed to use the date-of-death value as my basis. They also explained what documentation I should keep in case of questions later. Definitely worth it just for the time saved not being stuck on hold for hours. Sometimes being proven wrong is actually a good thing!

One thing nobody's mentioned is that personal vehicles usually don't generate taxable gains anyway. Cars almost always go down in value, not up. The only reason OP has a potential gain is because of the unique circumstances with the loan and inheritance timing. Most people who sell cars take a loss, which isn't tax deductible for personal vehicles.

Don't forget to check if your state has any inheritance tax too! Federal and state tax treatments can be different. I'm in Pennsylvania and was surprised to learn we have an inheritance tax even when there's no federal estate tax due. Cars might be exempt depending on your state, but it's worth checking.