Fast Cars… No Taxes
Most real estate professionals are familiar with the 1031 exchange—exchanging one property for another piece of property of equal or greater value, which allows you to defer the tax on the capital gains. But the 1031 can also apply to other like-kind property, not just real estate. Recently a client asked me about exchanging a classic car:
I have a 1967 Ferrari, for which I paid $150,000 several years ago. A broker has come to me with a client willing to pay at least $800,000. I’ve heard you can exchange one car for another car? Thanks!
Congratulations on a great investment. You probably will want to do a 1031 exchange because the capital gains tax on a collectibles (such as antiques) are taxed at 28%. That is higher than the rate for typical capital assets, which is 15% for appreciation and 25% for the depreciation.
A couple things to keep in mind:
The I.R.C. requires that the property you are exchanging be “like-kind." This means you typically must go from a car to another car. The personal property like-kind standards are more stringent than the standards for real property. Property must be either in the same Asset Class (cars are in Asset Class 00.22) or, if the property is listed in the North American Industry Classification System Manual, then the property must be in the same six-digit product class. Your accountant or attorney can help determine if the property is considered like-kind under the tax regulations.
The property must have been held for investment or business, and the new replacement car must also be held for investment or business.
The timeline requirements remain the same: You have 45 days to identify your new replacement car, and 180 days to complete the exchange. Remember that these timeline requirements include holidays and weekends.
Typically, Commercial Partners Exchange Company, LLC ( www.cptitle.com), acting as both escrow agent and as Qualified Intermediary (“QI") pays off the debt that is secured against the car when the holds the exchange funds. You give the QI the pay-off instruction, and the QI sends the wire to satisfy the lender’s lien.
The 1031 exchange works because the IRS does not tax a “paper" gain. The IRS knows that when a property owner reinvests the proceeds from the sale of one property into another property, the property owner has not “realized" an economic gain in a way that generates funds to pay any tax. The taxpayer’s investment is the same, just in a different form (one piece of property for another).
· This means that a 1031 is works best when you are NOT downsizing. For example, you would not exchange a $270,000 Ferrari for a $20,000 Ford. That would leave you open to a $250,000 tax liability. Your accountant can estimate the tax due (28% federal and 7.85% for the State of Minnesota) on every dollar of this downsizing. This is called a partial exchange because you are only deferring part of the gains.
· Normally, people buy “up or equal" in value and roll all of the net proceeds into the new car—or cars. That’s right: You can exchange for multiple cars if you identify them within the 45 days.
· Finally, investors typically offset the debt paid off on the old car with new debt on the replacement car.
For more information on like-kind Asset Classes and to get started on a vehicle 1031 exchange, find the title with the Vehicle Identification Number and call Commercial Partners Exchange Company, LLC.
Speaking of Ferraris, remember the scene in Ferris Bueller’s Day Off where Cameron Frye kicks the running 1961 Ferrari GT250 off the jack stand, causing it to rocket out of the room, smash through the window, and crash to the forested floor below? It wasn’t a real Ferrari—it was a fiberglass fake. Good thing, too, because only 104 of that model were made. The producers of Ferris Bueller’s Day Off received several angry letters from car lovers who thought an actual Ferrari had been destroyed.