Down the Rabbit Hole we go….
Tax time has passed and that’s typically the signal that spring is here and another season of collector car gatherings, auctions, acquisitions and sales is upon us. Where is the car market going this year? Well, aside from taking a wild guess or relying on shady bluebook values or on inflated auction prices, there are a few indicators to look at.
The first thing to look at, believe it or not, is the stock market. It will indicate if it’s a buyer or seller market. The stock markets like high interest rates and evenreds4 a touch of inflation. The car market is the exact opposite. When the market is down, the low interest rates are attractive in the car market for both buyer and seller. Buyers can afford more, and sellers can ask more, potentially shedding some inventory that they’re overextended in. That never happens! So, it can be a good time to part with a failed project with a little dignity.
Next, it’s time to evaluate your position. Did your Collector car increase in value last year? Is it worth more than you paid for it? If so, keep in mind that you will have to pay 28% in taxes on the profit. So, if you profit $100,000, yep that’s right, it’s $28,000. You cannot claim a loss unless you are an investor. Look at your purchase price, how much you’ve invested, and get it accurately appraised. Having a solid presale appraisal gives you a number to work with for the reserve needed. It also shields you from overzealous tax auditors. They will always pick the highest value which isn’t going to help you. As long as your reserve covers the taxes, auction fees (if applicable) and what you have invested, you’re good. You’re looking to get the break-even value, anything you make over that amount is profit and the 28% tax takes care of itself. This goes for buying and selling.
Don’t look at fire sales or distressed sales as a comparison, it will only throw you off and lead to other problems, such as insuring it for replacement value. Know the current and most importantly, the intended use. Then assess the grade. (See Below), some cars are worth more untouched, that’s largely up to the buyer, and it helps to know what the mood with the particular car is. A good example is Carrol Shelby’s Daytona. It was found and purchased for an undisclosed price. It is parked in someone’s Bat Cave, hidden from society for now. Even though it’s a number 4 car and 60’s vintage, it is a historical or Provenance vehicle. (See Vintage/Classic article) It’s worth more in unrestored condition. Even removing the dust is taboo.
So how do you avoid that pesky Capital gains tax? In short, it’s not easy. You really have to evaluate and make some decisions. If you are investing, keep on very important thing in mind; You aren’t driving it, or it is actively engaged in business use and is depreciable. Investment vehicles are almost always a historical or number 1 cars, that’s it, period, end of story.
Finance strategist says: Yes, there are a few potential ways to reduce or avoid capital gains tax on cars, including like-kind exchanges (also known as a 1031 exchange), using capital losses from other assets to offset your capital gains, and donating a car to a qualified charitable organization. Feb 15, 2024
That means if you sell a car, you have to give one away. How fair is that?
Another option is: To deduct the classic or antique car:the car must be of a type that's subject to wear and tear decay, decline, or exhaustion; and. the car must be used in your trade or business. Apr 10, 2019 (Engage Investments.)
So, it seems that the IRS and congress have this pretty well sewn up. When you sell a car at a higher price, you inevitably drive the Market price and affect other investors or even yourself if you tend to purchase the same type of collector car. So, don’t cut off your nose to spite your face as they say.
Well. That brings us back to the same question. What to do? Selling at a loss isn’t going to help, especially if its to settle a tax burden, that would just sting and have no effect. So, in a loss situation it’s best to hold. Sit on it until you can make a little and eat the taxes.
To get a little more complex, and create more frustration with this, trades are not tax exempt (IRS Form 8949) This is for assets held less than a year, so no, trading doesn’t really work as you are required to report the value. One end of the deal is going to pay some tax, unless it’s a straight trade. Appraisals would be good for both cars in this case. A lot of collectors avoid this by not transferring the titles, but at some point for the car to be worth any real money, ownership will need to be proven, and someone is going have to pay the piper.
Back to the 1031. The1031 allows you to defer taxes upon exchange of a ‘Like-Kind’ vehicle. Here’s the catch: The car cannot be for personal use. It must be for investment or used exclusively for business use. This is why intended use is so important to an appraisal. The type of value matters also such a fair market and Actual cash value or replacement cost which is always higher. There’s a good article here about the 1031 Exchange: https://www.premierfinancialservices.com/2014/11/05/1031-exchanges/
Grades are less important as long as the values align. The other part is that the car that you traded must not be used for personal use either. You can also put it in specific typs of trusts that end up with a portion of the value or sale being required to go to charity. This is investment advisor stuff you can easily find online for a better explanation. The bottom line here is that you aren’t going to be driving it if you go this route. The trusts are a minimum of two years. So, this sheds a little light on why you see the same cars go to auction every 2 or 3 years. You can check the current use if the car has a proper appraisal.
Now this is where we always shoot ourselves in the foot. We help each other out by fudging the price a little to save on the sales tax. Seems like the right thing to do at the time. So, congratulations, you won a prize. You not only lowered the value of the car, you increased the capital gains tax due upon the sale Also, using buyer seller stated value is a bad idea. The DMV will honor it, and you’ll save a buck, but the DMV does not put the grade of the vehicle. They pick the highest value and attempt to tax you on that amount. Appraisals can fix this problem by bringing the value down. It will then be a stated value, not a straight bluebook value designed for dealers, but it won’t immediately fix the stated value, there won’t be enough offset to compensate with one appraisal for that particular car.
So, to reiterate the basics; Once you have assessed the value and the potential future value, you can review your buying or selling decision. Do not sell in distress, you’ll end up giving it away. You can sell it at a loss which is different from distressed sales. You get the same results, but you learn your lesson the hard way.
Holding and waiting is a good option. Watch the stock market, interest rates and inflation. When these are up, your car value is down, sometimes dramatically. When the rates go up, so does your value. It’s a pretty straight forward way to recover losses. People buy collector cars as the rates drop, which reduces inventory and drives the prices up. As you would surmise, when the rates start to go up, the car values begin to go down and inventory drops. You want to sell right before that happens.
Some larger investors may sell at a loss when values drop because they can write off the loss. Real fair huh….I’ve seen investors tear cars apart and then get them appraised to claim a bigger loss. Not super ethical on their part, but not the problem of the appraiser whose sole purpose is to find an accurate value and support it.
Overall, there’s no good tried and true way to avoid the tax on a collector car and drive it. Trading for like vehicles or buying investment grade cars is an option, although most investors turn cars every 3 or 4 years. You can also just make it a hobby like many, just be aware that if you profit, you pay. Last bit here is definitely keep your proof of purchase price, because as you would expect, they are going to pull out the N.A.D.A guide,, KBB, or Edmunds values and give you the lowest dealer trade in value they can find, increasing your profit and subsequently your tax.
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