Collecting fine art, exotic cars and antiques is a passion. Whatever your prized collectible, it’s helpful to understand the tax consequences of your interest. It may not change your desire for collecting, and it shouldn’t. But knowing there could be a tax benefit is a bonus that any collector would welcome.
So how will your Ferrari — or other collectible for that matter — be taxed when you buy, sell or exchange it? It depends a lot on whether you are considered a Collector, an Investor, or a Dealer.
The following chart summarizes the taxes by type of owner.
|Tax Considerations||You are a licensed business; and buy and sell cars not for personal use||You won car(s) but do not drive them||You own car(s) and drive them|
|Do you owe sales tax when buying car(s)?||NO||YES||YES|
|Tax deduction for deductible loss car-related expenses?||YES*||NO||No|
|Income tax deduction if you sell car for less than what you paid?||YES**||YES||NO|
|Do you collect the sales tax when selling car(s)?||YES||NO||NO|
|Income tax rate if you sell car(s) for a profit||10% to 37%||28%||28%|
|Can you avoid paying taxes on car profit by exchanging car for another one?||NO||NO||NO|
|*The tax code requirements for deductibility of any expense is that it be both ordinary and necessary.
**A business must make a profit in 3 of the last 5 years to avoid having losses limited by “hobby rules.”
Chart provided by Laird Norton Wealth Management is for informational purposes only. For complete information regarding the tax advantages of collectibles, please contact your tax advisor.