When garage sale time settles in, you know that having one garage sale or yard sale a year doesn't make you a business. But it might make you subject to taxes and local regulations, depending on the state where you live and have that sale. Before setting out items for your garage sale or yard sale, check on these issues involved with the "business" of holding a garage sale:
- Local permits and licenses for garage sales or yard sales
- Income taxes on the profits from the sale
- Sales taxes on the cost of the items sold
Before you decide to have that garage sale or yard sale, do your research on these local, state, and federal laws, taxes, and permits.
Check with your city or county to be sure you are complying with local ordinances for dealing with COVID-19. Many localities have set up specific COVID-19 procedures for applying for permits and conducting garage sales.
Business Licenses and Permits for Garage Sales
Business owners in many cities are required to get a business license or permit to open a business. Some localities include garage sales as businesses. Whether you are required to get a permit for your garage sale depends on your locality.
Some typical regulations:
- Limiting the number of garage sales per year
- Limiting the number of consecutive days
- Spreading the number of garage sales out over the year
- Limiting number of signs
- Requiring size and placement of signs
- Requiring that sale items be moved indoors at night
Some towns and cities might not be this strict, butt check with your locality before you put your garage sale ad in the newspaper. Some localities require a special activity permit that limits the number of participants and/or vehicles.
If you have several garage sales in a year, you might get a visit from a city official asking to see your garage sale license. Again, it depends on the regulations of your city, so check before you start having a garage sale on a regular basis.
Income Taxes on Garage Sales
For tax purposes, garage or yard sales might be divided into three categories):
- The casual sale
- The hobbyist
- The business
The casual seller is not looking to make a profit but to get rid of stuff and make a little money. The hobbyist wants to sell something, but may not be looking for a profit. The business seller is intentional about making a profit.
Most garage sellers are of the casual sales variety. When you have a garage sale or yard sale you are selling items you already purchased and for which you have already paid the taxes. The IRS says, "If you sold an item you owned for personal use, such as a car, refrigerator, furniture, stereo, jewelry, or silverware, your gain is taxable as a capital gain."
But a garage or yard sale usually nets you less than the price you paid for the items. In this case, you're just getting rid of things and hoping to get some money for them. If these items are sold at a loss, you don't have a capital loss. and you can't claim the loss on your income tax return. You also can't deduct the costsof holding the garage sale (buying signs, for example).
Garage-Selling as a Hobby
The hobbyist or business seller, on the other hand, probably has the intention of making a profit. If your garage sale turns into a hobby, you may be able to deduct costs up to the amount of your hobby income. While there is usually no paperwork on these sales, carrying on a business on a regular basis can draw the attention of the IRS.
Garage Sales and Sales Taxes
Whether your state expects to collect sales taxes from your garage sale depends on the state. Most states aren't going to go out of their way to worry about a couple of hundred dollars from a once-a-year yard sale, but you never know
In Iowa, for example, the state department of revenue classifies garage sales as "casual sales" and says these sales are not subject to sales tax. They define casual sales as (1) nonrecurring (except for the sale of autos, on which sales tax must be paid for all transactions), and (2) the seller must not be engaged in a for-profit business for this sale. Iowa says two sales in 12 months is nonrecurring, but three sales are recurring.
Check out these tips for advertising your garage sale and other garage sale tips.
Disclaimer: The information in this article is general and is not intended to be tax or legal advice. Every situation and location are different. Be sure to check with local and state regulators before having a garage sale or yard sale.