The sale of classic and collector cars can be very costly for investors if not structured properly. However, by using a personal property exchange, the sale can be treated as an exchange that is not taxable – namely a 1031 exchange.
1031 Exchanges of Classic Cars
We have performed many of these 1031 exchanges for investors, on many different types of cars. In order to defer all of the gain, your replacement car typically should be equal or greater in value than your old relinquished car, and all of your equity (or proceeds) from the sale of your old relinquished car should be reinvested into your new replacement car.
The key factor is that both the car that is given up and the new car that is received, must both be held for a qualified purpose.
What is a Qualified Purpose?
A qualified purpose means that you are holding the car either as an investment or for use in your trade or business. This means that you cannot do a 1031 exchange on your family car because this family car is being held primarily for personal use.
The maximum capital gains rates for collectibles is 28% (as opposed to a mere 20% which is currently the ordinary maximum capital gains rate). This means that the tax savings for collectors is much more advantageous than with other types of property.
There are very few people who know how to properly structure a 1031 collector car exchange. To avoid making a costly mistake before you sell, you should make the proper arrangements with an experienced qualified intermediary first so that the transaction is treated as a trade or exchange (rather than a sale and repurchase) to be sure that you qualify for maximum tax savings.
These type of exchanges are harder to implement than real property exchanges because there are fewer formalities and structure. Often deals are done informally without much of a contract or closing; a good QI can help add-back in the structure to make the deal work.
- 1031 Hotline: If you have questions about 1031 exchanges of classic cars, feel free to call me at 612-643-1031.
Defer the tax. Maximize your gain.
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