Classic Car 1031 Exchange
Classic car sales can generate big profits, but the tax consequences can be daunting. If you are thinking about selling one, be sure to have your CPA determine the taxes due upon an outright sale (both federal and, if applicable, state taxes). You might decide just to hold on and wait, but economic cycles (boom-bust) and rate increases (the end of cheap money) may have an impact—in the investment world, often what goes up must go down.
But what if you could sell now and avoid (defer) those taxes? Assuming you can establish investment intent for your classic, you can avoid the tax bite by selling in a 1031 exchange, but that requires the purchase of one or more replacement cars. But, you may ask, how does selling in a seller’s market and then also buying in a seller’s market help. Maybe it doesn’t, but at the same time it’s worth thinking about. Brokers and enthusiasts will confirm that various brands and models peak at different times.
On a more personal note, maybe the classic you are selling represents too many eggs in one basket (sell one and buy several), or you’re just tired of that “old car,” or maybe you want to take some money off the table (i.e., downsize your total classic car investment) in a partially taxable 1031 exchange. Another possibility, let’s assume you have collected a stable of highly appreciated classic cars over the years, but still long for that ultimate Ferrari, etc. (sell several and buy one). Or maybe you don’t want to continue storing your classic (are you downsizing to retirement, or maybe want retirement income?). If so, there may be sale and leaseback replacements available. Anyway, if you are thinking about selling, you should at least discuss the pros and cons with your CPA.
It’s easy for you to enter into an exchange agreement with a qualified intermediary (QI) and then sell your classic either privately or through an auction. When your car sells, the buyer or auction company simply wires the sale proceeds to the QI’s account where it awaits reinvestment into your replacement car or cars. Following your sale, the hard part is to identify replacements within 45 days and to purchase all of your replacements within 180 days. If you don’t meet these deadlines the tax from your sale will be due. There is no turning back once you commit to sell your classic.
But there may be another way. If you have the resources available to do it without the proceeds from your sale being available, how about buying your replacement car or cars first (any temporary source of funds will do)? Wouldn’t that eliminate the risk of not being able to identify or purchase your replacement on time? A reverse 1031 exchange can accomplish just that (buy your replacement now and sell your classic later).
Jeff is a “car guy” and welcomes your inquiries about 1031 possibilities for the sale of your classic car.