What is the used EV tax credit "first transfer" rule?

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The "first transfer" rule is one of the most confusing parts of determining if a sale qualifies for the federal used EV tax credit. The main goal of the rule is to ensure that the credit can only be claimed once per vehicle, specifically at the time of its first sale after the law was enacted… If you had to read that sentence more than once, you're not alone.

Adding confusion, guidance from the IRS appears to be more restrictive than necessary. In this article, we'll explain how this rule works and why the IRS guidelines are set up the way they are.

What is the "first transfer" rule?

The IRS FAQ Topic D, Question 7 states:

It is the first transfer of the vehicle after Aug. 16, 2022, of the Previously Owned Clean Vehicle Credit other than to the person who was the original user of the vehicle.

What does this mean? It means that a vehicle purchased used after August 16, 2022 is no longer eligible for the used EV tax credit. In other words, if you're buying an EV and the previous owner bought it after August 16, 2022, it's not eligible for the tax credit. If they're the original owner (they bought it brand new), then it is eligible no matter when they bought it.

What if the previous owner didn't claim the credit when they bought the vehicle?

It doesn't matter if the seller claimed the credit or not. According to the IRS, the congressional intent of the first transfer rule is to allow the credit only at the time of the first transfer after the law was enacted (August 16, 2022). The IRS explains this reasoning in this paragraph of the final regulations.

This is also why this cutoff date won't change year after year. In other words, the cutoff date won't be August 16, 2023 in 2025. The cutoff will always be August 16, 2022.

Why doesn't the IRS allow dealers to check if a credit has already been claimed?

The IRS released final regulations on May 6, 2024 and in this publication they describe why the first transfer rule seems more restrictive than necessary. Specifically, their explanation for this question can be found here.

The primary reason is to protect confidential taxpayer information. If the IRS created a tool that allowed dealers to check if a credit had already been claimed for a VIN, it would indirectly disclose confidential taxpayer information.

What if the previous owner bought the vehicle brand new?

The vehicle is eligible! In this case the previous owner is the original owner so a subsequent sale would be the first time the vehicle was sold as a used car. It doesn't matter if they bought it before or after August 16, 2022.

What if the previous owner bought out their lease after August 16, 2022?

When a vehicle is leased, it is owned by the leasing company or "lessor". When the lease is bought out by the lessee, ownership is transferred from the leasing company to the lessee. At that point, the lessee becomes the legal owner of the vehicle.

Although it seems logical that the individual was the original owner of the vehicle since they've been driving it since new, they technically bought it used from the leasing company. A vehicle history report would reflect this transfer of ownership as well. We've clarified this question with the IRS directly and their guidance is consistent - a lease buyout is a transfer of ownership.

That means if the previous owner bought out their lease after August 16, 2022, the vehicle is no longer eligible for the used EV tax credit.

Does the number of previous owners matter?

No, a vehicle can have one, two, or even ten previous owners and still be eligible for the tax credit. What matters is when it was purchased. If the previous owner bought the vehicle used after August 16, 2022, it is not eligible.

What if the vehicle was purchased by a dealer after August 16, 2022?

Sales to a dealer do not disqualify a vehicle from being eligible for the credit. IRS FAQ Topic D, Question 7 states, "The original user's sale of the vehicle to a dealer or a subsequent dealer does not negate the vehicle's eligibility for the credit under the first transfer rule."

How do dealers (including KeySavvy) check if a vehicle is eligible?

The IRS requires dealers to review a vehicle history report to determine when the vehicle was last sold. This is described in IRS FAQ Topic J, Question 2.

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About Andrew Crowell

Andrew is an avid car enthusiast, software engineer, and business leader in the automotive and e-commerce industry. He's owned a couple Mazda Miatas, an E46 M3, a Subaru WRX STI, and a Porsche 911 Turbo.

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