Tax Exemption Between Relatives
If you purchase a vehicle from another person, 6% tax is due of the full purchase price or fair market value, whichever is greater. No tax is due if you purchase a vehicle from an immediate family member. An immediate family member is defined as:
- Parent (natural or adoptive)
- Brother or sister (includes half-brother and half-sister)
- Child (natural or adopted)
- Father-in-law, mother-in-law, brother-in-law, sister-in-law, son-in-law, daughter-in-law, grandparent-in-law, grandchild-in-law
- Stepparent, stepbrother, stepsister, or stepchild*
- Grandparent or grandchild
- Legal ward, or legally appointed guardian with a certified letter of guardianship
*for tax purposes, a step relationship ends upon divorce
No other relationships qualify for a tax exemption. This includes:
- Aunts, uncles, cousins, nieces, nephews, great-grandparents, great-grandchildren
- Step-grandparents or step-grandchildren
- Former spouses
- Common-law relationships, unless the common-law marriage took place before January 1, 1957
Supporting Your Claim
The Michigan Department of Treasury administers the collection of tax, and reviews tax exemption claims filed with title applications processed at Secretary of State branch offices.
If you claim a tax exemption based on a family relationship, the Department of Treasury may contact you to prove the relationship. You do not have to bring proof of relationship with you when processing a title application at a Secretary of State Branch Office. But if your claim is selected for review by the Department of Treasury after the title transfer, you will need to submit documents proving the qualifying relationship.
Documents to support your claim must show the relationship between you (the buyer) and the seller.
If an exemption claim is found to be invalid or cannot be proven, Treasury may impose penalties as high as 100% for making a fraudulent claim.
The following examples describe valid claims and the documents needed to verify the family relationship.
Kathy Smith buys a vehicle from Mary Brown. Kathy and Mary are sisters with the family name of Jones. Kathy claims the tax exemption on the title transfer. If contacted by Treasury to support her claim, Kathy would provide copies of her and Mary's marriage licenses. The licenses should include the parents' names. If the parents' names are not on the marriage licenses, she must also provide copies of her and Mary's birth certificates.
David Cole gives a vehicle to Tina Wilson as a gift. Tina is David's daughter and is married to Brian Wilson. Tina claims the relative tax exemption on the title transfer. To support her claim, Tina would provide a copy of her marriage license. If her marriage license does not include her father's name, she must also provide a copy of her birth certificate.
Joe Young buys a vehicle from his uncle (his father's brother). Because uncle relationships do not qualify for exemption, Joe must have the vehicle titled in his father's name (brother-to-brother exemption), then transfer the title to his name (father-to-son exemption). If Joe chooses to transfer the title directly from his uncle to himself, 6% tax will be due.
Ed Thomas purchases a vehicle from Tyler Arnold and claims a tax exemption of stepbrother. Ed's father is married to Tyler's mother, which creates the step relationship. Documents to prove this relationship are (1) copies of birth certificates indicating parents names for both Ed and Tyler, and (2) a copy of the marriage license of each of their parents.
However, for tax purposes only, if there is a divorce of the parents before the title transfer, the step relationship ceases to exist, and the transfer is taxable.
Manufacturer/Employee Discount Plans
Automobile manufacturers offer an employee benefit program that allows their employees to buy new vehicles at a discount. A common stipulation is that the vehicle title must remain in the purchasing employee's name for a least 6 months.
Some employees use the discount program to buy a vehicle for a friend, who will make all payments and then transfer the title after the six-month period. The friend, who paid 6% sales tax on the original purchase, will have to pay 6% use tax on the retail value of the vehicle when the title is transferred six months later.
When such transactions involve relatives, the tax exemption status is the same as described above for relatives.
Determining Tax Liability
Although the Secretary of State collects 6% tax when the title is transferred, final determination of the tax owed on vehicle transfers is made by the Michigan Department of Treasury. The tax rate is 6% of the purchase price or the retail value at the time of transfer, whichever is greater.
If Treasury's determination of tax liability differs from the amount collected when the title was transferred, the purchaser must pay the difference plus interest and possible penalty. Penalties are severe if a claim for exemption from tax is fraudulent.
For more information you may contact the Department of Treasury by calling (800) FORM-2-ME (367-6263) and request Revenue Administrative Bulletin 1998-4, "Transfer of Motor Vehicles Between Relatives". This information is courtesy of the Vehicle Claims Unit, Michigan Department of Treasury.
NOTE: Your situation may differ from the examples provided. Please check with our Information Center at 1-888-SOS-MICH (767-6424) to make sure you have all the correct paperwork before going to a branch office.