Have you had your eye on a special vehicle lately? Perhaps you’re in the market for a classic Ferrari or Lamborghini. Maybe you fancy the old-school classic models from the 1920s and ’30s. The fact is many of the world’s high net worth individuals enjoy collecting cars. After all, it happens to be one of the many perks of being wealthy. These collections range from classic and vintage vehicles to rare models or collections focused on a certain genre, like sports cars; or even a specific make, like Rolls Royce or Porsche. Whatever type of collection one might keep, it’s always a good idea to know the ins and outs of collectibles and how they will affect your tax bill.
Don’t Give the IRS a Reason to Come After You
The thing about car collections is that it is typically something only the wealthy can afford. Therefore, it is also something the IRS likes to keep a close eye on. Many collectors simply purchase vehicles for the enjoyment of it and just add them to their collection, with no intention of selling them or trying to make a profit. However, there are also many collectors that do it for business. These collectors aim to buy low and sell high, which means they are in it for more than just a hobby. These are also the collectors that typically get into trouble with the IRS. The tax agency likes to make examples of tax cheats and a car collector that doesn’t pay his/her total tax bill is the perfect target for the IRS.
What to Watch Out For
If you purchase cars for a hobby then you don’t have much to worry about. However, if you sell cars from your collection and make a profit then you have to answer to the IRS. If you’ve owned the vehicle for more than a year then any gain you make when you sell it is considered a capital gain and thus you will owe only 20 percent instead of 39.6 percent if you sell it before a year’s time. You can also deduct any expenses you incurred selling your vehicle and/or any restoration expenses. Of course, make sure you keep good records so you can prove those expenses. It’s also important to note that cars are not subject to the 28-percent federal tax on collectibles.
Avoid a Tax Altogether
There is another important point to consider when selling a collector car. If you use the money you’ve earned from a sale to turn around and purchase another vehicle you can avoid being taxed on the gain from the sale. By placing the ownership of your vehicle in the hands of an accommodator who sells the car and holds the money you can avoid paying tax. That’s because you have up to 45 days to purchase another vehicle with the money you earned from your sale. This allows you to avoid actually being in possession of the cash, which means you won’t owe any tax on it. Of course, whatever portion you don’t spend on another vehicle you will have to report to the IRS as again.
Contact GROCO for More Car Collecting Info
There are all types of car collections and each one is unique to its owner. However, no matter what type of collection you have or how large your collection might be, be sure you don’t get run over by the IRS when it comes to taxes. If you plan on selling a part or all of your collection or adding to it then make sure you understand how it will affect your taxes. Of course, if you have any tax questions regarding your car collection or any other type of collectible, then please contact us at GROCO for more information. Just call 1-877-CPA-2006, or get in touch with us online by clicking here.