Garage sales and income tax

Garage sales might not be as prominent as they once were, what with eBay, Craigslist, and Facebook marketplace offering a great way to sell off your unwanted items. However, many people still like the idea of a garage sale. It is estimated that almost 9 million Americans hold garage sales every year. Therefore, it is perfectly natural to consider how garage sales and income tax mix. If you aren’t careful, you might need to contact one of the best tax defense companies to help you sort out the potential mess. That is why this article is there to inform you how not to get into that particular mess in the first place.

How do garage sales and income tax mix?

Garage sales might seem to be able to circumvent the IRS rules, as there are usually no receipts being handed. However, this is not the case. Garage sales follow the same rules as any other sales. That being said, there are three things to consider when trying to figure out how garage sales and income tax mesh together:

  • Capital gains
  • Write-offs
  • Sales tax
person sitting in an office in front of a laptop thinking about garage sales and income tax
There are quite a few things to consider when it comes to garage sales and income tax.

You will also want to keep track of every item that you sell, as well as how much you sell the item for. This can be very important whether you want to avoid a tax audit or not. The IRS randomly selects people for a tax audit; any money you might have gained from a garage sale will “muddy the waters”. At the very least, the IRS might think your finances are suspicious. And you don’t want that.

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The best thing to do is to understand how exactly garage sales and income taxes work together and act accordingly. Understanding capital gains is usually the first step.

Capital gains on garage sales

Any gain you get from a garage sale must be reported in your tax return. Before you scream bloody murder, however, there’s a simple catch to it. You only need to pay taxes on gains.

According to the IRS topic No. 409, “Almost everything you own and use for personal or investment purposes is a capital asset.”

However, simply selling capital assets is not considered a capital gain. For the money received from a garage sale to be considered a capital gain, you must make a profit from it. You need to sell the item for more than its original value. Typical garage sales do not usually sell items for more than their original value. There are exceptions, of course, such as selling a $0.99 trading card for millions due to its current rarity. In that case, you will need to report the money received as a capital gain.

In other words, you create a capital gain every time you make a net profit off an item. Even if you sell an item for $10 more than its original price, it will still be a capital gain. You might want to keep track of valuable items, but they are few and far between, so you can safely hold a garage sale and not worry about them. You will know if anything requires special attention.

person handing a $10 bill to another person
You create a capital gain every time you sell an item for more than its original price.

Most of the time, you will sell your items at a loss. That is the beauty of garage sales, at least for those purchasing items. Garage sales are more about decluttering than money-making. Unless you sell items worth far more than their original price, you will not have to worry about capital gains and taxes.

Can you write off sold items?

Since most garage sales operate under a net loss, it is natural to think that you might be eligible for tax benefits. After all, all your capital losses can be deducted under normal circumstances. However, garage sales are an exception to this rule. The IRS explicitly states that any losses that result from the sale of personal property items are not tax-deductible. If you are looking to boost your tax refund amount with the losses from the garage sale, you might want to think otherwise. While this may seem slightly unfair, as you are expected to pay taxes on gains, it is perfectly normal when you think about it.

In essence, you can sell your items for an amount up to their original value and not worry about any taxes whatsoever. It is only when you make a profit (something that few garage sales achieve) that the IRS may consider knocking on your door.

What about sales tax?

Garage sales are usually exempt from any sales taxes. We say “usually” due to the fact that some states might “force” you to charge a sales tax under certain circumstances. For example, the state of Texas has an “occasional sales” rule, where you can get an exemption from sales taxes if you only sell one or two taxable items during a 12-month period or if you do not make more than $3,000 in sales.

Every state has its own rules and regulations that govern how garage sales are handled. Just like there are so many different types of taxes in the USA, there’s no shortage of unique rules and regulations. It is in your best interest to make sure that you are operating under your state’s guidelines. You can find all the necessary information easily, as it is publicly available, or you can hire a tax professional to help you out. Either way, you need to know the rules before holding a garage sale.

Aside from standard rules, there is another thing that you might want to figure out about garage sales and income tax: Selling levels.

person doing a calculation about garage sales and income tax
Most of the time, calculating sales tax for garage sales is not necessary.

Three levels of selling

Due to the fact that garage sales are so popular, many people consider making them a regular thing instead of a one-off venture. With this in mind, the IRS recognizes three levels of selling:

  • Casual
  • Hobby
  • Business

These levels govern how the IRS will look at the money that your garage sale is making. Understanding them may also help you avoid IRS tax relief scams. Depending on the situation, your garage sale may create large profits after all. But that might not necessarily mean that the IRS will view it as a business venture.

Casual garage sales

Most garage sales fall under this category. Casual selling means that you are selling your items on an infrequent, occasional basis. Casual garage sales usually do not turn up profit, and the IRS does not scrutinize them too much. You can’t cut your tax bills in any way by holding a casual garage sale, either. If you are looking to influence taxes with your unneeded items, you might want to consider donating them to charity instead.

Hobby garage sales

When you start holding several garage sales throughout the year, you reach the second selling level. However, if you are still not intending to make a profit, the IRS will consider them as a hobby. You still can’t benefit from any tax reductions for businesses, but there is a chance that you can write off some hobby expenses. Make sure to keep a list of all your expenses, as well as proceeds. In most cases, you can itemize your deductions and deduct any hobby-related expenses you might have.

You can’t deduct expenses that are above the total revenue, of course. Nor can you deduct any amount that is in excess of 2% of your AGI.

person looking at books
If holding a garage sale is your hobby, you might even be able to deduct some of the expenses.

Business garage sales

Sometimes, garage sales can bring in serious profit. This is when the topic of garage sales and income tax completely turns around. The fact of the matter is that some people choose to create a business out of buying old items and selling them through garage sales. If this happens to be the case, then there is a clear intention of generating profit. Any activity whose intent is profit generation is inherently a business activity. Meaning that you need to pay taxes on all the profits.

However, once you start making money off garage sales, you will also have access to numerous business tax deductions. Feel free to take advantage of all the business tax tips for entrepreneurs you can get your hands on. Just make sure that you are reporting your taxes correctly. Like any other business, you will report all your purchases and sales on Schedule C.

Additionally, business garage sales are eligible for business losses. If your expenses offset your income, you will have access to all the tax benefits of a financial loss.

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How to make the most out of garage sales

Regardless of whether you are planning on a casual, hobby, or business garage sale, you will want to maximize the proceeds. Here’s how you can do just that:

  • Organize properly
  • Do not put a price tag on anything
  • Advertise
  • Start on Friday or Thursday
  • Be friendly

You might also want to consider upping the security of your garage sale. Make sure that your house is locked at all times, keep your money and phone with you, and be on the lookout for counterfeit bills.

Organizing is very important

Many garage sales suffer from a lack of any sort of organizational activity. People tend to just create a haphazard collection of stuff. What you want to do instead is organize your items as a supermarket does. You want your items to catch the shopper’s attention. Don’t be afraid to use standard practices such as “Buy 3, get one for free!”

black friday sale stickers
“Supermarket tactics” can bring in greater profits.

No price tag can mean a higher price in the end

One of the most time-consuming (and stressful) things in a garage sale is figuring out the exact price of your items. However, it is also a very important part of the entire process.

That being said, you don’t need to put a price tag on anything. In fact, it is usually in your best interest not to do so. That way, you can simply ask for offers from the buyers. Most of the time, you will either get a price similar to the one you have in mind or get a higher one.

Advertise, advertise, advertise

Garage sales “live and die” by the number of people that check them out. Naturally, you will want as many people as possible checking out your items. And how do you get more people to your garage sale? Through advertising.

There are many places that offer you the possibility of free ads (Craigslist, eBay, YardSales, etc.), but you can also utilize social media (Facebook, Twitter, Instagram, etc.) to get more exposure for your sale. If you have pricy items to sell, you might also want to explore paid options or create 30-60 second videos showcasing your items. The more you work on advertising, the more profitable the garage sale is, simple as that.

Thursday and Friday are the best days for garage sales

The best time to hold a garage sale is either on Friday or on Thursday. You also want to start the sale early. Starting at around 6-7 a.m. will ensure that you get attention from people that are driving their kids to school or going to work. There is not much competition during that time, either. Lastly, this is the time when you will find the most “serious” shoppers.

Being friendly goes a long way

Lastly, make sure that you are friendly and available to answer questions as well as to negotiate. Find a few things you can give away at no charge, and throw in some freebies for people who buy a lot of stuff. Being friendly may even entice the people who are simply watching to swing by and purchase something.

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Most of the time, you don’t need to worry about garage sales and income tax. This only comes “into play” when you sell items worth more than what you paid for them. At all other times, you don’t need to worry about a thing.

For more information on taxes, best tax relief companies, and anything else that concerns taxes, Consumer Opinion Guide is your go-to resource. From tax rules for Airbnb rentals to crowdfunding taxes, we can provide you with all the information you might need to make the best choices!

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