What are the Tax Consequences of Selling Items at a Garage Sale?

Family child care providers often hold garage and yard sales this time of the year. They sell their old toys, clothing, and a variety of used household items.

They do so because they are going out of business or just want to unload some of the stuff they have accumulated over the years.

What are the tax consequences of selling your stuff?

1) Items you never used in your business (sleeping bag, your own children's clothes, etc.)

As a general rule, if you sell it at a loss, there is no tax consequence. If you sell it at a gain, report the gain on Schedule D and then on Form 1040.In the vast majority of cases, you are selling items at a garage sale for a lot less than what you paid for them. Therefore, pocket the cash and don't report anything to the IRS.

If you bought a sleeping bag on sale for $100 and managed to sell it for $125, report the $25 gain on Schedule D. You'll pay a little in taxes.

2) Items you used in your business (toys, tricycle, DVDs, etc.)

The general rule is that items sold at a loss are not deductible because you already got a tax benefit by deducting them. Items sold at a gain are reported as taxable income.Items used 100% for your business: If you sold it at a gain, report the gain on IRS Form 4797 and carry it over to Schedule D and then Form 1040. You'll pay a small amount in taxes. If you sold them at a loss, you cannot claim a business loss. See exception below*.

For example, let's say you bought ten toys for a total of $300 and deducted them several years ago. If you sell them for $320, report $20 as a gain on Form 4797. If you sold them for $100, don't report any loss. That's because you already got the tax benefit of deducting the items.

Items used for your business and your family: Determine if there is a gain or loss on the business portion.

For example, let's say you bought several children's chairs for $500 and your time-space percentage was 40%. The business deduction you claimed was therefore $200 ($500 x 40%). If you sold them for $100, the business portion of the loss is $40 ($100 x 40%). However, you can't both claim a deduction and a loss, so don't report the loss. If you sold it for $600, however, then the business gain is $40 ($600 x 40% = $240 - $200 = $40). Report the gain on Form 4797.

Summary: In almost every case, you will be selling items at a garage or yard sale at a loss. In that case, you won't be able to deduct anything as a business expense. You can keep the money you received and you don't have to report it as income.

If you are out of business when you sell your stuff at a loss there is also nothing to report on your taxes. If you sold them at a gain, report the gain on Schedule D.

Exception: It's possible you could claim a business loss if you bought items used in your business and have not fully depreciated them. In this case you must take into account the depreciation when determining if you have a gain or a loss. This involves a complicated calculation that I fully explain in my book Family Child Care Tax Workbook and Organizer. Because the calculation is so complicated, many providers don't bother with trying to deduct a small loss.

So, enjoy the garage and yard sale and keep your cash, without having to worry about the IRS!

Tom Copeland - www.tomcopelandblog.com

Image credit: https://www.behance.net/gallery/20770291/Hand-Lettered-Garage-Sale-Signs

For more details, see my Family Child Care Tax Workbook and Organizer.