If you invested in a classic car several years ago, you're probably patting yourself on the back right now. Collectible car investments have appreciated considerably in recent years, and they are in high demand. But if you decide to sell, don't be surprised when you find yourself looking at a 28% capital gains rate.
The rates for the sale of collectible property are much higher than those on the sale of real estate. So, is there any way to avoid paying inflated capital gains rates on the sale of your collector car? The answer is to make a 1031 exchange. This is a tactic that is often used by real estate investors, but that can be particularly helpful in the sale of collectible property.
By making a 1031 exchange instead of selling outright, you can defer your capital gains taxes indefinitely, allowing that 28% to be reinvested and continue working for you. This is useful for real estate investors, but even more so for those holding personal property for investment. Here are a few things that you should keep in mind when making 1031 exchanges on personal property, such as a classic car or other collectibles or antiques.
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.
With the demand for collector cars at an all time high, how can you afford to lose that 28% of your profits? The smart collector will opt to make a 1031 exchange instead of paying the exorbitant capital gains rates.
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.