Classic cars have appreciated tremendously in value in recent days, and they are in high demand. Your first inclination may be to sell your car outright and cash in on your investment, but a look at the capital gains tax rates might change your mind.
Now is certainly a great time to cash in on the classic car you’ve been holding for investment, but a look at the tax rates on the sale of collectibles might put a damper on your enthusiasm; as much as 28% of your profits could end up going to capital gains taxes.
Imagine, for example, that you have a 1967 Ferrari that you bought for $270,000 but which has since appreciated in value to $800,000. At this point, you’re likely quite pleased with your investment. But you might balk at the 28 percent capital gains rate on the sale of this car, and you’d be right to do so, because a 1031 exchange could save you that 28 percent and let you reinvest that money instead of losing it to taxes.
First of all, you need to be aware that like-kind requirements on personal property are far stricter than those on real estate. When making a 1031 exchange on real estate, you can, for example, exchange an apartment building for a farm. When making an exchange on a collector car, you can only exchange it for another car, not for a crane or a piece of aircraft equipment. Also keep in mind that it is best to exchange for property of equal or greater value. If you downsize, you will not receive the greatest possible tax deferment.
1031 exchanges on personal property are conducted in much the same manner as real estate exchanges, but one important difference is that the like-kind requirements that must be met for the exchange to be valid are quite a bit more stringent. While a real estate investor can, for example, exchange an apartment building for farmland of equal or greater value, an investor dealing with personal property can only exchange a car for a car, a plane for a plane, and so on.
By making an exchange on your personal property instead of selling outright, you can avoid a huge hit to your returns and maximize your potential profits.