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Trying to help a friend out. Friend bought a nice muscle car brand new in 1970 and sold it in 2007 for a sizeable appreciation. Initially my friend was told by her accountant that a Capital Gains of 15% was owed, but more recently friend was told 28% because "the car is an antique". Does this make sense?
Appreciate any guidance. Thanks!
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Did a little research, nothing is ever 'clear' with the IRS!
There are 3 'maximum' tax rates, pertaining to different situations. The 3 maximum tax rates are 20%, 25% & 28% - we'll focus on the 28% maximum since it includes a situation for 'collectibles'. Per the IRC:
"Twentyeight percent rate gain includes capital gains and losses from the sale or exchange of collectibles (as defined in section 408(m) without regard to section 408(m)(3)) held for more than one year and certain other types of gain."
So, what is a 'collectible'? Strange as it sounds, the term 'collectible' is defined in the IRC pertaining to Pension Plan Acquisitions! (The logic is such that a pension plan should treat the purchase of a 'collectible' as a distribution from the plan assets... stop snoozing!). Section 408(m) defines 'collectible':
" <font color="red"> (2) Collectible defined
For purposes of this subsection, the term "collectible" means -
(A) any work of art,
(B) any rug or antique,
(C) any metal or gem,
(D) any stamp or coin,
(E) any alcoholic beverage, or
(F) any other tangible personal property specified by the
Secretary for purposes of this subsection.
</font>
What took me on a wild ride was the last statement regarding 'other tangible personal property' - it's a pretty wide net for the IRS to throw out there. So, I ended up in Section 408(m) where our gov. basically is giving themselves an open window to include additional items in the future (read: if there's a run on beanie babies, and the gov wants more $, define it as a collectible, and the tax rate jumps to 28%).
I would conclude that an automobile is not defined in the IRC as a 'collectible' - 'at this point in time', but it's subject to change by certain democratic schoneyeists.
Therefore, the sale of an automobile is considered a capital asset, per the IRS instructions for Schedule D: Capital Gains and Losses:
"Capital Asset:
Most property you own and use for personal purposes, pleasure, or investment is a capital asset. For example, your house, furniture, car stocks and bonds are capital assets." Yada, yada yada.....
So, whoever gave your friend that snipet about 'collectibles' is pretty sharp! Kudo's or TastyKakes to them!
It's always good to know your tax position before you file - and not be doing tax research after the audit notice comes in the mail.
BTW, it sounds like Chad has a good CPA, you don't cheat the government, something about 'death & taxes' being interelated on several levels.
Remember, tax planning is encouraged, tax avoidance is unlawful.
PS: Forgot to add, you can't avoid the 28% tax on collectibles by going into a partnership - they still getcha when you sell the partnership interest - just in case any of you enterprising folks were considering this option to protect your 'collectible' wine collection!