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capital gains taxes on old cars


Guest GT52
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Instead of having a root canal, I’ve been doing some “estate planning” to make myself miserable. I’m hoping that someone here has had some experience in “capital gains” when selling a collector car.

First, what I know…briefly. Cars are capital assets, and if you sell one and make a profit you owe capital gains on the profit. From the sales price you can deduct your “basis” (what you paid for the car), the cost of selling it, and restoration costs for which you have receipts (your labor is not deductible). This much is pretty straightforward. I know lots of us have probably made a few bucks on a car and conveniently ignored it, but if you’re selling a car that might reach into six figures I’m thinking that that probably isn’t a good idea.

So, in most cases any gain when selling an old car will be a long-term capital gain (held more than one year) and is presently taxed at a maximum rate of 15%. This is where it gets tricky. “Collectibles” are a special category of capital gains, and are taxed at a maximum rate of 28%. Big difference, especially if you’re talking six figures. I have found substantial disagreement among tax professionals, both lawyers and accountants, as to whether an old muscle car, for example, is a “collectible“ for the purposes of tax law. I would say that the majority view is that they are collectibles, just on the basis that people collect them. However, “cars” are not specifically mentioned as a category in the tax code where they list typical “collectibles”, and on that basis many professionals take the position that cars are not collectibles for the purpose of capital gains. The opposing view is that the list in the tax code is not meant to be absolutely complete, and cars not being listed doesn’t mean that they aren't a “collectible”.

Has anyone here actually paid capital gains taxes on the sale of an old car? If so, do you know if you paid the 15% rate, or the 28% “collectible” rate? Did a lawyer/CPA do your taxes, or did you do them yourself? Any input from the IRS either way?

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GT52 are you talking state tax or federal tax.. Just pay the ten dollars and change the car titles...

I went to the DMV and asked if I had ti fill out a form.. He said no.. This was the head of the DMV...

No, I'm talking about "capital gains taxes", which are collected by the IRS on your individual federal tax return...states also collect capital gains taxes, as part of your state tax return, mostly following the federal law. I'm not talking about any sales taxes and fees collected by state DMVs...those are completely separate issue and vary by state.

Basically, if you make money when you sell a "capital asset", such as a house, a piece of land, or in this case a car, you generally owe taxes on the money you made. If you bought a car for $2,000, did nothing to it, and sold it 10 years later for $20,000, you owe capital gains taxes on $18,000. My question is whether the federal tax rate you have to pay is 15%, for "ordinary" capital gains, or 28%, for "collectible" capital gains. The professionals disagree, but the majority opinion seems to be 28%. The majority isn't always right, and that's what I'm trying to figure out.

Here's an article on the subject, by a "professional" who comes down on the side of the rate being 15%:

http://blog.classiccars.com/selling-classic-without-selling-irs/

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Sorry, cahartley, I hadn't gotten your post yet when I posted, so we both gave the same link.

The trouble is that the opinion expressed in the article that we linked to, that cars aren't collectibles and therefore are taxed at 15%, is definitely not the majority opinion...which is not to say that it is wrong. It appears there might be disagreement even within the IRS auditors. I'd love to find someone who can cite a case that was resolved in tax court, that would definitively settle the issue, or, maybe someone who filed at 15% and the IRS either accepted it, or changed it to 28%.

I don't want to sell my car thinking I'm going to pay 15% and have the IRS come back on me for 28%.

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^ Give that a look-see >>> http://www.irs.gov/pub/irs-wd/0217059.pdf

My tax preparer wasn't sure either but I can tell you this:

A few years ago I sold a VERY "collectible" , 6 figure, tractor.

I called the IRS and asked if it would be considered a Collectible BEFORE I closed the deal.

The man, a superior at the IRS, said NO......that's NOT a collectible.

I started to say something to him but he hung up on me....... :eek:

That was all I needed to know!....... :) and it was reported as an ordinary sale.

Edited by cahartley (see edit history)
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Guest AlCapone

Different of course because I live in Canada but I have already been cautionedby my accountant. Because I have a substantial personal collection he also says if I am selling prior to death I am eligible to pay capital gains taxes. He advises to keep every receipt that is appropriate to each car both parts and repair expenses to be used as deductibles . This becomes very tricky if you have traded up for car and cash. You obviously can't afford to live or die ( lol ) !

Wayne

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^ Give that a look-see >>> http://www.irs.gov/pub/irs-wd/0217059.pdf

My tax preparer wasn't sure either but I can tell you this:

A few years ago I sold a VERY "collectible" , 6 figure, tractor.

I called the IRS and asked if it would be considered a Collectible BEFORE I closed the deal.

The man, a superior at the IRS, said NO......that's NOT a collectible.

I started to say something to him but he hung up on me....... :eek:

That was all I needed to know!....... :) and it was reported as an ordinary sale.

Thanks a lot, cahartley, for the first-hand experience with the tractor...very interesting. I wonder if you had called back and got a different person if you'd have gotten a different answer? Not that I'd recommend doing that! My suspicion is that a lot of people are paying the "collectible" rate of 28%, on the advice of tax professionals, while the IRS is letting it slide if you claim the "ordinary" rate of 15%...in other words, the IRS is allowing people to self-define whether the car they sold is a collectible.

The link you provided includes the IRS language regarding collectibles that causes the confusion: "any other tangible personal property specified by the Secretary for purposes of Section 408"... in other words, besides the property specifically mentioned (art, rugs, metals, gems, etc), any property that the Secretary says is a collectible, is a collectible.

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GT52, you are very lucky to be coming out of a car sale on the side where capital gains are a concern. My experience has been mostly on the capital LOSS side...

Yep, TexRiv_63, the reason that capital gains taxes don't come up very much, in regards to cars, is that most people don't make money when they sell a car. Just FYI, if you do lose money selling a car, the IRS is very specific that you cannot claim that as a capital loss against other capital gains you might have. In other words, heads they win, tails you lose! I know I'm lucky if I make money, I just don't want to share more of that luck than is necessary!

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Thanks a lot, cahartley, for the first-hand experience with the tractor...very interesting. I wonder if you had called back and got a different person if you'd have gotten a different answer? Not that I'd recommend doing that! My suspicion is that a lot of people are paying the "collectible" rate of 28%, on the advice of tax professionals, while the IRS is letting it slide if you claim the "ordinary" rate of 15%...in other words, the IRS is allowing people to self-define whether the car they sold is a collectible.

I might have delved more deeply but when the agent's superior suggested, in so many words, that I was a crackpot thinking that tractor was a collectible and hung up on me I didn't feel a need and my tax preparer agreed with me.

She had looked into it as well but as were talking about a significant difference in tax rates I did some research too.

When the time comes for me to sell my cars I won't even bother reporting the sales because I'll lose my ass on all of them........and I don't care.

I'm having more fun with my cars than I EVER did with tractors....... ;)

Being a pragmatist I never fell in "love" with iron.......but I sure liked it a lot! LOL

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In an effort to avoid this sort of issue, I have poured far more money into my car then it will ever be worth. Problem solved..yeah, that's why I did it...

Are you asking the question because you actually plan to sell? Sorry if I am stating the obvious, but if someone inherits the car, it's an estate tax issue, not a capital gains issue.

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...Are you asking the question because you actually plan to sell? Sorry if I am stating the obvious, but if someone inherits the car, it's an estate tax issue, not a capital gains issue.

I'm actually trying to decide when/if to sell, and that's why I'm trying to be certain what the tax rate is...15% taxes, and selling is reasonable, 28% taxes, not for me. If I don't really need the money, I'm actually giving some consideration to just holding the car until I can no longer take care of it, and then donating it to a non-profit instead of selling it. The non-profit could then sell the car and pay no taxes on the gain, so the entire value of the car would go to the non-profit. What I don't want to do is sell the car thinking that I'm paying 15% and have the IRS come back on me later and tell me I owe 28%. Although, with the information that I've been able to gather so far, I think that for most people who sell a car the best strategy is to file your taxes at the 15% rate, and put the burden on the IRS to make you pay the 28%...just make sure you have the money available for a few years.

You're absolutely right, if you die with the car it becomes part of your estate and will be taxed, or not taxed, according to estate tax law. The person who inherits the car will have a "basis" based on it's current valuation established in probate. They could probably turn around and it sell it tax free.

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The only way to really get a reliable answer is to consult a CPA, and he won't be able to tell you for sure about tax year 2014 now. There are so many changes to tax regulations that are up in the air and may still be changed that they can only guess. Good luck.

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Stick with the 15% Why pick a scab that might make everyone else end up at 28%. If they said "...no..." document it and do your thing. This is like one of those discussions that never gets resolved because the most removed and remote of questions are posed. Bottom line, if a pro and a tax man told me 15% instead of 28% then that's what I'd pay and never look back. Then there's the one time gift deal for a family member which is tax free. Gift the car, then anyone with even the lowest of financial understanding knows what to do next.

Edited by Highlander160 (see edit history)
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Mr. GT52, I can see you are intelligent and have put a

lot of thought into finances. Here's a further point to consider:

Is the "cost basis" of an antique car stepped up at a person's death?

If it is (as it is for stocks), that could be a big advantage.

For example, if you bought a Classic Cadillac in the 1960's for

$5000, put another $15,000 into it some years ago, and it

is now worth $120,000, your current cost basis is $20,000.

If it is "stepped up" at death, the cost basis for your heirs would

be the $120,000 at the date of death. If THEY subsequently

sell the car, and the stepped-up basis is in fact allowed, the capital

gains taxes could be very substantially less.

Another method: For people with large estates, I know there are

several permissible says to "pass through" assets to reduce

large estate taxes. I have read about them but do not know specifics.

All the best to you--and please plan to live for many more years and even forever!

Edited by John_S_in_Penna (see edit history)
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Another thought: If you own your own business,

and it is incorporated, could the car's ownership be transferred

to the corporation? You would want to sell it to the corporation

for a price that didn't give you any capital gains.

The corporate form is intended for continuity.

When you pass on, the car would still be owned

by the family corporation.

There certainly are intricacies to be evaluated or

worked out by your accountant, but it may be worth

seeing whether these suggested principles are valid in tax law.

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I don't want to expand the topic too much, because, as was pointed out, the possibilities are almost endless...I'm mostly interested in what happens if you sell the car, before your death, though I understand that others may be interested in other strategies.

You'd like to think that a qualified CPA or lawyer could give you a definitive answer, but that has definitely not been my experience when I've asked the question and got conflicting answers. At this point, I have no confidence that questioning the IRS in advance will get a definitive answer either.

"Gifting" in advance of your death merely transfers your "basis", and the eventual capital gains tax liability, to the recipient of the gift.

If you die with the car it becomes a part of your estate, and taxes at that time, if any, will be based on estate tax law. Whether you have a will or a trust, or not, will define the complexity, time, and cost of probate, but it won't change what will happen regarding the car, tax wise. The person who inherits the car will inherit it at the appraised value at the time of your death, and could then sell the car at that price without having to pay capital gains taxes.

When I said I was considering donating the car to a non-profit, I didn't mean a non-profit I set up myself...I really don't have any idea about the possibility or complexity of doing that. I was talking about simply donating it to something like the World Wildlife Fund, and allowing them to sell the car. Obviously, in that case I'm just choosing to give the car away instead of paying taxes on it...not exactly a financial windfall for me!!!

With the information I have right now, if I sold the car today I would pay the 15% capital gains tax rate and cross my fingers for the next 3 years that the IRS wouldn't come back on me and say that I owed 28%. My confidence in that working isn't great, but I'm sure it is possible. I'd really like a more definitive answer, like a citation of a case resolved in court, before I make a final decision, but...

Thanks to all for participating.

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If your car has "collector car" plates like YOM or permanent antique then it's sort of an open window to being a collectible asset. I tag my old cars like regular old drivers. This has less to do with the actual topic and more to do with the cop who has a wire hair up his hiney and wants to hassle a driver for not going to a "meet". The gift thing, as I understand it, a person is entitled to a tax free gift once in their adult life. I could gift my daughter a $100K car and it's tax free, just as if i gifted $100K in cash. Brain food, maybe...?

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If your car has "collector car" plates like YOM or permanent antique then it's sort of an open window to being a collectible asset. I tag my old cars like regular old drivers...The gift thing, as I understand it, a person is entitled to a tax free gift once in their adult life. I could gift my daughter a $100K car and it's tax free, just as if i gifted $100K in cash...

LOL, one of the "professional" opinions that I got over the years was that if the car didn't have "antique" plates on it then it wasn't an antique, or a collectible. I seriously doubt that that opinion would wash in an IRS audit, but who knows what some low level employee at the IRS might use in making a judgment. I'd sure hate to have to argue that one in a court though.

"Gifting" beyond the $10K/year/person (I think that's still the limit) is a bit more complicated than you describe, and a gift of $100K, cash or car, would certainly have to be declared, and then be counted in the future against the limits which govern the taxing of estates. I don't pretend to know a lot about estate taxes, but one thing you can't do is make a mad rush to give things away in order to avoid the estate taxes. With the dollar threshold for taxing estates that exists today, most people's estates will not be taxable anyway, so no need to give things away. I'd still seek professional advice if you're planning on passing your car on through your estate. Fortunately, the rules for that are pretty clear compared to the rules on capital gains being either "ordinary" or "collectible", which is my problem.

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very simple-you sell the car for cash and owe nothing-no trace whatsoever................................... or even a like kind swap, but prey tell, why the paper trail?

it is often reported at auctions that a car such as a Ferrari has set a new world record at 27 million or so- do you all believe that that is the highest sum ever acheived in a sale? why many sales are private and #'s have been achieved that are far greater.................

finally, if leaving it to someone in an estate- best possible solution is to buy insurance to cover the estate gains and have a wash.

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I wonder if I licensed and insured a vehicle as an everyday driver instead of a collector vehicle, if that would qualify as proof of it as a non-collectable.

You know, it seems simplistic, but as I said earlier in the thread I was actually told by a CPA that if a car didn't have antique plates on it then it wasn't an antique. I'd caution that that is definitely not the majority opinion. I also seriously doubt that argument would carry the day if push comes to shove with the IRS, but with a cursory review by a low-level employee at the IRS, maybe. It certainly can't hurt your position. I'm pretty sure that taking that position, along with the fact that "experts" disagree, would keep you from having to pay any penalty, if you file claiming the 15% rate and the IRS later decides that you owe the 28% rate...you'd still be stuck paying the extra tax, and probably interest, but no penalty. All the information I've been able to collect over the years leads me to believe that the best course of action for most folks is to claim the 15% rate and put the burden on the IRS to change it to 28%. Unfortunately that doesn't help me decide what I'm trying to decide. Where you're likely to get into trouble with a high dollar sale is conveniently forgetting that you sold the car, or taking steps that clearly indicate that you were trying to hide it. If a CPA recommends you do that, I'd find another CPA.

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Mr. GT52, have you contacted the AACA national office

in Hershey, Pa.? Perhaps Steve Moskowitz (Exec. Dir.)

can put you in touch with more knowledgeable people

in the club who have actual experience.

I see some of the opinions in this forum (mine too?)

have not been based on knowledge of your specific subject.

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Mr. GT52, have you contacted the AACA national office

in Hershey, Pa.? Perhaps Steve Moskowitz (Exec. Dir.)

can put you in touch with more knowledgeable people

in the club who have actual experience...

QUOTE]

I haven't, but that might be a good idea. I'm not sure how much they're in to answering individual questions, but it seems like a topic that might make a good article for the magazine if someone had knowledge on the subject. I wonder if the AACA could use their name recognition to get an answer out of the IRS...

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Current valuation established in probate. Probate only happens if you do not have a will or trust...

Will cost 350.00 Probate cost 8500 to 12K.

Not necessarily, and likely much more expensive than you think:

The cost of your will is only the entry fee. Wills are the "guidelines" for PROBATE. A will typically must be probated, at which time the lawyer and related expenses could be anywhere from a flat fee, to as much as half of the estate; and in Louisiana assets are probated twice - once on the death of the first spouse, and again on the death of the surviving spouse.

Revocable and/or Irrevocable Living Trust; Family Trust; Childrens Trust are just some of the financial tools which should be considered. I these cases the assets are donated from the individual to the trust which is then controlled by either husband and/or wife as Joint Trustees with the surviving spouse maintaining control as Trustee (and in Louisiana - not requiring probate/succession). Other individuals, such as children can be named as successor trustee. This means that assets can be passed from one generation to the next without excessive legal expense and court interference - but exercise caution in having these created properly - DO NOT just go on-line and try to "do it yourself"!

Edited by Marty Roth (see edit history)
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Marty in a trust or other forms you will need :

Power of attorney

Medical power of attorney

Financial power of attorney

Agent

Hipaa forms need to filled out..

Also look into this :

http://www.forbes.com/sites/advisor/2011/06/28/7-mistakes-with-stretch-iras/

The stretch IRA, when implemented properly, can be one of the great vehicles for transferring wealth to your heirs, maintaining the tax-deferred status of the bulk of your account until much later.

Edited by nick8086 (see edit history)
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Mr. GT52, the AACA national office would be happy

to assist its members! They are there to serve.

I don't know that they themselves would have the

answer to your question, but Steve M. could

likely put you in touch with some other experienced

collectors who could discuss their own experiences.

AACA has members from billionaires to dogcatchers,

and among them, someone has surely been in the same

boat as you!

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  • 3 years later...

One point and one question.   Do not trust your CPA.  90% of them will have you pay the higher "collectible" rate because they don't know any better.

 

Question:   I'm assuming if you trade a single car for 2 other cars with no cash your basis transfers proportionally.    So,  if I have a 50% paper gain on the single car,  when I get back the 2 cars my basis is 50% of the value on each of the new cars.   There is no tax owed until you sell one or both of the cars you took in trade.

 

Would anybody like to comment on that?   I think I'm right and my accountant is saying otherwise (see my first point).

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I think I went over this with my accountant before as well.  As long as it's like property,  there is no tax,  until you turn it into cash or cross the like property into something different.  Keep it all into cars or trucks and you are fine,  turn it into construction equipment or property and then you have to pay the tax.  I tired swapping one of my cars value wise for an excavator and she didn't like that. 

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6 hours ago, mercer09 said:

auburn,

you are def correct on the like kind exchange.

I would disagree with your cpa and the excavator. It too can be a like kind exchange. you take your excavator to shows, dont you?  ;)

 

If you dont, you should.

Of course that would necessitate a bigger truck and trailer to show it as well.  

I think you are on to something. Quite a few years to go before it can be HPOF.   Still has 98 percent original paint. 

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