Here's Why a Used Tesla Is Surprisingly Affordable Right Now

Here's Why a Used Tesla Is Surprisingly Affordable Right Now

The IRS will give you $4,000 for buying a pre-loved electric vehicle — plus prices are falling to historic lows

Lynnley Browning

A Tesla in a New York City showroom in 2020: Not all vehicles are eligible for a tax credit, and figuring out which cars qualify can be daunting.Spencer Platt/Getty Images

Many American consumers already know they can bank a lucrative tax credit when buying a new electric vehicle.

But fewer appear aware of a similar benefit for purchases of used EVs. With price tags on used and new green cars falling sharply over the last 13 months, it's now cheaper than ever to buy an older, best-selling Tesla or other non-combustion model.

But far from all cars are eligible for the credit. And buyers have to do a head-exploding amount of research to figure out what qualifies.

"You have to give the information to your accountant in the springtime," said Clark Kendall, the president and chief executive officer of Kendall Capital, a wealth management firm in Rockville, Maryland, that caters to so-called middle class millionaires. "It's difficult to figure out."

Still, doing so can be worth four figures in your bank account.

Since the start of this year, drivers who pay up to $25,000 for a pre-loved EV at a dealer can knock 30% off the sales price — up to $4,000 — come tax time next year.

What's known as a nonrefundable tax credit reduces the total amount of federal income tax a taxpayer owes. While the credit isn't instantly redeemable, it can eliminate a year's check to the Treasury Department come the April filing season. But any of the benefit left over after taxes are zeroed out, so the dollars can't be "refunded" to the taxpayer.

Only certain EV makes and models qualify, and the used vehicle has to be at least two years old and for your own use, not for resale.

Prices on used EVs have been falling since July 2022 largely due to prices cuts by Tesla, which controls 62% of the new EV market. When sticker prices on new models drop, so do price tags on their used cousins. Four in 10 recent-model EVs made by Tesla, Chevrolet, Nissan, Ford and Hyundai are now priced under $30,000, according to data from Recurrent Auto, a Seattle-based data startup and marketplace for buyers and sellers. Depending on where you buy, some come in at or under the $25,000 price cap, including a 2017 Chevrolet Bolt for $16,900 and a 2019 Tesla 3 for $25,000, according to the auto site Edmunds.

Prices for both new and used EVs rose during the pandemic because of supply-chain snaggles and inventory shortages caused by squeezed supplies of semiconductors. But since then, prices have declined, in part due to CEO Elon Musk aggressively slashing prices several times this year on Tesla's entire U.S. model fleet and forcing a price war with other automakers.

The tax credits came in a sweeping federal law that President Joe Biden signed last August with the goal of accelerating the pivot to non-fossil fuel energy and incentivizing Americans to buy clean cars. Green vehicles now account for 7.2% of all new car purchases in the U.S., Cox Automotive calculates.

A version of the tax benefit had been around since 2010, but relatively few consumers used it because the federal government restricted how many cars an automaker could sell while allowing buyers to claim the perk.

Then last August, Biden's Inflation Reduction Act said purchases of new electric cars and plug-in hybrids can quality for a $7,500 credit. But the rules for claiming the benefit are as complicated as the engineering behind the cars — and this year they've changed, making some models ineligible.

"Believe the hype: The electric vehicle tipping point is now," wrote the Southern Alliance for Clean Energy, a trade group and lobby in Knoxville, Tennessee, last December. The group said the credits would be a major force in getting consumers over the price hurdle of EVs, which are generally more expensive than traditional gasoline- and diesel-powered vehicles.

The law scrapped the automaker sales caps on how many cars could qualify for the tax credit come 2023. But it also introduced new restrictions.

One curb says the final assembly of qualifying vehicles has to take place in the U.S., Canada or Mexico. That means certain EV models from Hyundai, Kia, Porsche and Toyota aren't eligible.

In February, officials widened the types of cars eligible to include more models from Tesla, General and Ford after those companies complained they had been unfairly left out. But buyers still must do detective work: Because some carmakers build the same vehicle at multiple factories in different locations, they have to look to the vehicle identification number (VIN) to see if it qualifies for the tax break.

Last year about 17 new EVs and trucks qualified, including the Ford F-150 Lightning, the Volvo S60 Recharge and three models from Rivian. But the Chevrolet Bolt and models from Tesla and GMC Hummer were still under the sales caps.

In March, another rule said that as of April 18, buyers claiming the credit must purchase a car in which 40% of certain key minerals, including lithium and nickel, have been extracted, processed or recycled in the U.S. or in a trade-friendly country. The percentage rises in future years. The rule also said that at least half of the value of an EV battery's component must be manufactured or assembled in North America. That percentage also rises in subsequent years. The upshot, according to the Alliance for Automotive Innovation: The number of vehicles eligible for the credit is likely to dwindle in coming years.

Figuring out which vehicles qualify is a nightmare in part because the federal government doesn't supply a ready-made list for cars sold this year. The Department of Energy provided a list of vehicles by make and model that qualified last year, but for 2023 models, the agency forces consumers to type in a VIN.

As if that's all not complicated enough, this year the rules were tweaked to add in limits on eligible car prices and buyer household incomes. To claim the credit, a buyer has to purchase a new EV costing no more than $55,000 for cars or $80,000 for trucks and SUVs.

People who file their federal income tax returns singly or separately can't make more than $150,000 if they want the benefit. Married couples filing jointly are capped at $300,000. That means the time for a high earner to buy a new, $79,500 Rivian R1T truck and claim the $7,500 tax break was last year, not this year.

Income caps for buyers of used EVs are much lower, and range from $75,000 to $150,000, according to the Internal Revenue Service.

Still, Musk's price cuts made some new Tesla vehicles, including the Model 3 and Y lineups, eligible for the benefit; the Department of Energy added them to its list in June.

"It honestly feels like they're making it so complicated, they don't want people to put it on their tax return," said financial planner Dan Herron of Elemental Wealth Advisors in San Luis Obispo, California. "But it's definitely worth a shot."