Advice from any Tax Guys on Sale of a Car

[Hugh R]

I recently sold an old car at a "substantial" price over what I bought it for. I've owned it for 35 years. Question on capital gains. I have receipts from 1972 when I bought the car, but not complete, but I do have a fairly complete log book of expenses. Will the IRS accept this as a diligent record of expenses? Also, I'm putting my receipts and expense log into an Excel spreadsheet, will they allow expenses for operating costs such as gas, oil/filters, etc. Also what about insuring it for the last 35 years? I've maintained it for 35 years can't I deduct things like insurance against the basis of the car? I've searched the IRS website but haven't found any conclusive answers.

[BeyGon]

Why would you even mention it to them?

[hardflex]

my brother is in a similar situation. The money was wired to his account. Doesn't the bank have to notify the Feds of any amount over $10K? That's the Unknown.

[speeder]

Delete this thread quickly and talk to an accountant. Sales tax is paid somewhere every time the car is sold, that's bad enough. (Should only be the first time, IMO).

[fingpilot]

I tried to delete a thread I had started recently, and the old way of doing that has disappeared.

[speeder]

Hmm, you're right. he could still delete his post(s), though, making the responses nonsensical.

[competentone]

I assume the talk about "deleting the post" is in jest. I doubt tax agents browse these forums looking for violations.

Depending on how it was paid for, "forgetting" to report it might be an option, but if the transaction was in CA, then there are not only Federal capital gains taxes to consider, but state gains taxes too; if the state taxing authority shares data with the DMV, they might catch the omission. Also, if the car was purchased by a dealer, you might get a 1099 on the transaction. (The dealer might decide he needs to do this only after he talks with his accountant, or gets an inquiry from a taxing authority.)

I'm no expert, but was talking with my brother -- who knows a lot more about taxes -- and mentioned the situation. The short of it: You are probably going to be paying the 28% "collectable" capital gains tax on it (that is the Federal end, you may have CA state gains taxes too). Ordinary "maintenance" is not deductible, neither is insurance, storage, registration, etc. (similar to real property). Upgrades could be deducted against the gains.

Of course, this is a situation where you are really being screwed by the tax system. The odds are, you have no real gains; your "gains" are nothing more than inflation -- or a substantial portion of your "gains" are the result of inflation.

The car probably really hasn't become more valuable, the tool (money) being used to measure its value has just become worth less over that 35-year time period.

I've never heard of any legislation, or attempts at litigation, that would change the capital gains laws to make them "adjusted to inflation," but if it were done, it would make the tax system much fairer -- but I guess the government would end up losing a ton of money.

The best way to avoid the high capital gains taxes if you've held an asset for many decades -- and don't really need the money (and it is likely the asset will maintain its value over the rest of your lifetime) -- is to die still owning it. Your heirs get to sell the asset with the stepped-up cost-basis of the value of the item at your death. The capital gains taxes they pay is a lot lower -- it keeps money out of the hands of the government, which is always a good thing.

[Hugh R]

I read the tax code and it doesn't seem to fall under the "collectable" category. That's for art, coins, stamps, etc. My accountant said its the 15% capital gains for the feds and 9% ordinary income for California. I can speak to my accountant on Monday but I'm starting to assemble receipts and receipt books that I have and organize them. I understand the maintenance issue, but I know if you own an item like this and don't "maintain" it, it very rapidly become worthless. What would I do if I didn't buy new tires or brakes, or wheel bearings? The car would rot away and die. I know I can't write off insurance and vehicle registrations, only items that went into the vehicle. The problem is if you own it for 35 years and put in seven fan belts, can you only write off against the value of the vehicle the fan belt that was on the car when you sold it? What about several complete engine rebuilds and several paint jobs and releathering twice?

[BeyGon]

This will be interesting, I never heard of anyone that paid taxes on a car they sold here, only sales tax for the buyer. Maybe I just hang with the wrong group.

[competentone]

Originally Posted by Hugh R

....I understand the maintenance issue, but I know if you own an item like this and don't "maintain" it, it very rapidly become worthless. What would I do if I didn't buy new tires or brakes, or wheel bearings? The car would rot away and die....

Yes, and if you didn't replace the roof on a building when it needed replacing, it would "rot away and die" too, but that doesn't change the tax laws that consider roof replacement a "maintenance" item. The same with termite inspections/treatments, plumbing leaks, painting, etc.

Obviously, go with what your accountant tells you, over what any of us tell you here, but from my own (limited) knowledge, and from what my brother was saying, I think you're going to be stuck with "collectibles" gains on the sale.

(And like I said earlier, most of your "gains" are probably nothing more than "inflation.")

Just be happy to think about those millions on welfare who are depending on you to "pay your fair share...."

[pwd72s]

Hugh, I just sent you two PM's...both the same. Sorry I'm so bad with computers.

[avi8torny]

Your treating this car as an investment. It's not. Tax is paid when the car is sold/registered. You owe nothing. You should have paid the tax when you bought it. The state can't charge you tax...again.

[competentone]

Originally Posted by Hugh R

I read the tax code and it doesn't seem to fall under the "collectable" category. That's for art, coins, stamps, etc. My accountant said its the 15% capital gains for the feds and 9% ordinary income for California. I can speak to my accountant on Monday....

The subject sparked my interest and I was reading:
http://www.irs.gov/publications/p17/ch16.html#d0e39501

I don't see anything to indicate that an automobile is considered a "collectible" for tax purposes, and even if it was, it looks like -- depending on your overall tax situation -- you still might not owe the 28% collectibles rate. (They'll actually apply the lower 15% rate to collectibles depending on the other gains/taxes owed! Shocking!)

I haven't done a general web search, but this topic must have come up before with "car collecting" being as popular as it is in this country.

I'd be interested in hearing the conclusions of your accountant -- probably on Tuesday.

The 15% and 9% CA takes still sounds like a pretty big "kick in the teeth" -- have you calculated if you have any real gains, not just "gains" caused by inflation? Inflation calculator (I've never used the site, so don't know its accuracy): http://www.westegg.com/inflation/

[competentone]

Originally Posted by avi8torny

Your treating this car as an investment. It's not. Tax is paid when the car is sold/registered. You owe nothing. You should have paid the tax when you bought it. The state can't charge you tax...again.

Yes they can, if it goes up in value -- it's called "capital gains taxes," this is not about "sales tax." (Some states have "personal property tax" too -- like South Carolina -- you pay taxes every year on your vehicles!)

And if it goes down in value, you cannot deduct your losses -- even if you bought the car initially as an "investment."

[pwd72s]

Originally Posted by competentone

Yes they can, if it goes up in value -- it's called "capital gains taxes," this is not about "sales tax." (Some states have "personal property tax" too -- like South Carolina -- you pay taxes every year on your vehicles!)

And if it goes down in value, you cannot deduct your losses -- even if you bought the car initially as an "investment."

Here's a cut & paste from the IRS tax code link you gave...do you see automobiles on this definition of collectibles?






"Collectibles gain or loss. This is gain or loss from the sale or trade of a work of art, rug, antique, metal (such as gold, silver, and platinum bullion), gem, stamp, coin, or alcoholic beverage held more than 1 year. "

[competentone]

Originally Posted by pwd72s

Here's a cut & paste from the IRS tax code link you gave...do you see automobiles on this definition of collectibles?

"Collectibles gain or loss. This is gain or loss from the sale or trade of a work of art, rug, antique, metal (such as gold, silver, and platinum bullion), gem, stamp, coin, or alcoholic beverage held more than 1 year. "

Exactly! That's why I corrected my previous comment with the link and words, "I don't see anything to indicate that an automobile is considered a 'collectible' for tax purposes..."

It would appear, from reading the IRS's publications that capital gains taxes would not be owed at the "collectibles'" 28% rate.

That said, from my reading yesterday, the IRS clearly states in its publications that an automobile is a capital asset. Subsequently, it would follow that normal capital gains taxes would be owed if an automobile was sold for more than the cost basis the owner had on it.

Most cars depreciate with time; Hugh is in a rare situation owning a car that he sold for "substantially" more than what he paid for it 35 years earlier. (As I've explained, I suspect most of that "increase" in "value" is due to inflation -- inflation would account for around a 500% increase -- but the IRS does not recognize inflation when calculating capital gains.) Anytime you sell a personal capital asset (which is essentially any of your "stuff"), it is supposed to be "declared" and any capital gains taxes, if due, are supposed to be paid.

Practically speaking, the IRS would have very limited abilities "proving" what Hugh's cost basis is for the car -- but the IRS normally questions, then makes the taxpayer prove what he has claimed. Since it sounds like Hugh has done an "extensive restoration" on the car, I'm sure his cost basis could be shown to be very close to his selling price -- subsequently, his capital gain would be very small.

[LeeH]

Originally Posted by competentone

And if it goes down in value, you cannot deduct your losses -- even if you bought the car initially as an "investment."

This is the part that bugs me. If it goes up in value, please pay. If it goes down in value, too bad.

[Neilk]

Hugh,

With all your travels, you should have had 1/2 deposited at your buyer's agent's local bank and picked up $9,500 at a time.

[BeyGon]

Originally Posted by LeeH

This is the part that bugs me. If it goes up in value, please pay. If it goes down in value, too bad.

If you win in Vegas they take out the taxes, you don't get credit for your losses.

[LeeH]

Originally Posted by BeyGon

If you win in Vegas they take out the taxes, you don't get credit for your losses.

You do get to deduct losses from winnings.