Are you a collector? People collect all kinds of different things, including stamps, art, sports cards, jewelry, coins and cars to name just a few. Speaking of collectors, collectibles can be a great hobby but they can also draw the attention of the IRS, one of the greatest collectors of all time.
Collector Cars Are Not Tax-Free
When it comes to collector cars, they can be a popular collectible among the wealthy. However, there several tax issues surrounding collectible cars that you should be aware of if this is your collectible of choice. It’s no secret that the IRS loves to make waves with its investigations. Well-to-do car collectors who decide to skimp on their full tax bill are the perfect targets for the IRS to make examples of.
How Much Do You Owe?
So let’s take a look at some of the issues you should know about when collecting cars as well as some tips to make sure you’re paying the proper amount of tax on your collector cars.
- If you sell a collector or classic car that you owned for at least a year, then the profit you make is a long-term capital gain. That means it’s taxed at lower rate than if you only owned the car for less than a year. The difference is significant; 20 percent compared to 39.6 percent.
- When you sell a collector car you can also write off some of the expenses from your profit and thus lighten the tax burden. Any money you spend to restore or sell the car can be subtracted from your profit. However, make sure you keep good records.
- When it comes to purchasing a collector car, you will also be liable for state sales tax on that car if you drive it away. If you have it shipped somewhere else, then you will have to pay sales tax to the state where you have it shipped.
- Another option some collectors try to pursue is to obtain a dealer’s license so they can avoid any state sales tax altogether. However, if you were a collector and not really a dealer, then you would actually be making a false claim to your state, which could land you in hot water. On top of that, you might have difficulty insuring your vehicles and you would also eliminate the capital gains tax break.
Another important thing to keep in mind when dealing with collectible cars is that if you sell a car from your personal collection and you have owned for more than a year, then you might be subject to a higher tax rate of 28 percent. That’s due to a special provision, which boosts the long-term capital gains rate on collectibles. However, if you have other capital losses then they could offset your profit from the sale of a collector car.
You will also need to be prepared to fill out additional forms with your tax return when you have capital gains and/or losses. All of the important details of the sale of your vehicle will need to be reported on Form 8949. Then, combined with your capital losses, the information will be put on Schedule D where you will need to tally your net gain or loss.
Collecting on Collector Cars
As you can see, although collecting cars can be a great hobby and an enjoyable way to spend your free time, for those who buy and sell collectible cars, the tax collector is always lurking. Therefore, make sure you understand all of the applicable tax laws that apply to your car-collecting hobby. Otherwise, the tax collector may take you for a ride.