1031 Exchanges Work For Classic Car Investors

by Martin T. Remington

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.

Imagine, for example, that you have a 1967 Ferrari that you bought for $270,000 but which has since appreciated in value to $800,000. At this point, you’re likely quite pleased with your investment. But you might balk at the 28 percent capital gains rate on the sale of this car, and you’d be right to do so, because a 1031 exchange could save you that 28 percent and let you reinvest that money instead of losing it to taxes.

In light of the enormous capital gains tax hit that accompanies the sale of classic cars and other such collectibles, those who have put money in these kinds of investments have a unique opportunity to profit from making an exchange instead of selling up front, and will benefit even more from the tax deferral than those with real estate investments.

If you identify your replacement properties within the 45-day deadline, you can even put your proceeds towards the purchase of more than one replacement property. In addition, keep in mind that both the car that you are exchanging and the replacement must be held for business or investment purposes.

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.

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