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Cost basis for capital gains

Discussion in 'Vintage Ferrari Market' started by fiatosca, Dec 18, 2019.

  1. fiatosca

    fiatosca Karting
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    Not sure where to post this so thought this would be as good a place as any.

    Which expenses can be added to the car's cost basis at time of sale? I know restoration costs and sales fees can be used. How about routine maintenance (especially newer cars with timing belt intervals)? What about long term storage fees? Other stuff?

    Tax season is just around the corner....
     
  2. energy88

    energy88 F1 World Champ
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    A commission or finders fee if you pay one. Be sure to document.
     
  3. donv

    donv F1 World Champ
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    Sorry, but very little of that stuff adds to the cost basis. Routine maintenance and storage fees, certainly not. Restoration costs? Maybe, but not sure about that one. The tax laws are not very friendly when it comes to collector cars.
     
  4. INRange

    INRange F1 Rookie
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    Probably depends on the State where the car is registered and kept (although those can be different places). In Virginia we have the dreaded car tax which means your car is assessed just like a house every year and you get a tax bill. The point is that their bill is a "reasonable" measure of worth so there should be less debate. They know what you paid for it and would exclude anything listed as maintenance in the owners manual that would add to the cost basis. That leaves Restoration which means you made a series of major investments in the vehicle to claim a higher value. If you do the work yourself....they will probably only allow the cost of materials just as they do with home improvements.

    Let's say you bought a 1996 Ferrari for $50k and had it restored by a reputable shop to "new" condition and that cost $40k. So I believe your new cost basis should be $90k for the vehicle. If you sold your now Platinum Points car for $110k, then you have a $20k gain.

    I'm sure there is a lot of gray areas with collector cars. My complete speculation is that unless you are in that business ......most of these transactions aren't reported. Certainly a State could figure it out if the new owner registered it in the same State. Far less likely if the car is sold to an out of State buyer.
     
  5. Smiles

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    Realy?

    The cost basis can be increased with a restoration?

    Where the heck is this in the IRS code???

    Matt
     
  6. Texas Forever

    Texas Forever Four Time F1 World Champ
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    Capital expenditure v repairs.

    Rebuilding a motor = capital expenditure

    Oil change = repair.
     
  7. donv

    donv F1 World Champ
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    I think the question is whether a "restoration" is a capital expenditure versus simply bringing it back to it's original condition when new. Is there guidance from the IRS on that?

    Engine rebuild, for instance-- if the engine was worn out and then rebuilt to stock specs, is that a capital expenditure?
     
  8. turbo-joe

    turbo-joe F1 Veteran
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    it depends where you live. in germany for example ( up to now :) ) if you have a car longer then 1 year there is no capital gain tax, only when you sell within 12 month after you buy it
     
  9. Smiles

    Smiles Moderator
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    Right.

    I repainted my 308 because the thirty year old paint was cracked and crazed. Was that a Cap Ex or a repair?

    One distributor went bad, sending a lot of fuel with no spark down one bank of cylinders. Half the engine was replaced. Was that a repair or a restoration?

    Matt
     
  10. dm_n_stuff

    dm_n_stuff Global Moderator
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    well . . .

    I dunno, and I'm not going to guess. I let my accountant decide when I filed my taxes, many moons ago, on the Dino sale. I don't recall owing much after all the deductions were totaled up, but I bought a basket case (semi basket case) and did a ground up restoration.

    This isn't one where I'd guess, let the guy who does your tax returns do his job.

    I do know this, we added the cost of the restoration to the basis on the car, and did not add any regular annual maintenance.

    pretty good article here: https://journal.classiccars.com/2014/01/22/selling-classic-without-selling-irs/

    D
     
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  11. INRange

    INRange F1 Rookie
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    The appropriate section:

    Rebuild of property to like-new condition - A taxpayer owns a fleet of vehicles. After the end of the class life of each vehicle, the taxpayer disassembles and rebuilds each vehicle according to the manufacturer’s original specification. Costs paid to rebuild each vehicle are for restorations, and therefore are improvements, because each fleet vehicle is restored to a like-new condition after the end of its class life.

    https://www.irs.gov/businesses/small-businesses-self-employed/tangible-property-final-regulations#Whatisthefactsandcircumstancesanalysis
     
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  12. Smiles

    Smiles Moderator
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    Thanks for that.

    So my descriptions in post #9 are ameliorations.

    Matt
     
  13. plastique999

    plastique999 F1 Veteran
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    Agree, definitely talk to your CPA...
    Article from above is from 2014...tax laws change.
    Interestingly I spoke with mine yesterday asking about investment grade cars. He told me, as of January 2018, the 1031 exchange for trading up on cars and avoiding taxes is not applicable anymore


    Sent from my 16M
     
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  14. Texas Forever

    Texas Forever Four Time F1 World Champ
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    I'm not aware of any IRS rulings or cases about adding restoration costs to basis. The only thing I can recall is the IRS saying vintage cars may or may not be subject to the collectible tax. I take the position the collectible tax is a factual issue of intent. If you originally brought a vintage Ferrari for personal use and later sell it for a profit, I believe you are not a "collector." Regardless of how much money you make on the deal. (Conversely, if you lose money, the loss is nondeductible.)

    The repair v capital issue normally revolves around whether the expense extends the useful life of the asset. For example, if you put a new roof on a rent house, this is a capital expense. If you simply replace a few shingles, this is a repair.
     
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  15. fiatosca

    fiatosca Karting
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    I guess I can understand not reporting a gain of $20K or so and simply feign ignorance in the case of a random audit. I'd be less comfortable doing so with larger figures
     
  16. Texas Forever

    Texas Forever Four Time F1 World Champ
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    I don't know if this article is behind a pay wall, but it discusses the collectible capital gains tax. One quote from the article:

    A common misperception is that an asset is not a collectible for tax purposes unless it is explicitly identified in either Sec. 408(m) or Prop. Regs. Sec. 1.408-10(b). However, as provided in Prop. Regs. Sec. 1.408-10(b), the IRS has the authority to deem any tangible property not specifically listed in either Sec. 408(m) or Prop. Regs. Sec. 1.408-10(b) as a collectible for Sec. 408(m)(2) purposes and, thus, by reference for Sec. 1(h)(5) purposes. For example, collectibles could include restored automobiles,8 valuable baseball cards, or even rare comic books. Thus, taxpayers who did not report gains from the sale of these assets as collectible gains simply because these assets were not explicitly listed as collectibles in either Sec. 408(m)(2) or Prop. Regs. Sec. 1.408-10(b)(8) might be exposing themselves to potential tax underpayment penalty risk under Sec. 6662(d).9

    8 Letter from Harry J. Conaway, associate tax legislative counsel for the Treasury Department to Sen. Richard Lugar, R-Ind., July 5, 1988; reprinted in CCH Pension Plan Guide ¶17,378H.

    https://www.thetaxadviser.com/issues/2019/nov/taxation-collectibles.html#fn_8
     
  17. donv

    donv F1 World Champ
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    Can you explain the difference between "collectible" and ordinary income tax? When I sold my Boxer, I believe it was ordinary income? I know my tax guy is quite experienced in this area, and of course I did what he said... and I know it resulted in a bump to my income.
     
  18. plastique999

    plastique999 F1 Veteran
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    So where would the CGT fit...not truly vintage but I’ll be changing insurance to collector car insurance.
    Are repairs a write off?
    What is capita gains if I sell with gains?
    I’m in SoCal....


    Sent from my 16M
     
  19. Texas Forever

    Texas Forever Four Time F1 World Champ
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    Maximum capital gains rate is 20%.

    Maximum collectible capital gains rate is 28%.

    Maximum ordinary income rate is (kinda) 37%.

    I doubt your tax guy reported your Boxer gain at 37%, probably 20%.

    Here's how I see the difference between capital gains and collectible capital gains.

    * Say you brought a Micky Mantle card 40 years ago for $1,000 because you liked Micky Mantle. Yesterday, you sold that card for $1MM. If this is your only sale of any significance and you haven't been buying and selling Micky Mantle cards, I would have no problem saying you qualify for the 20% capital gains rate.

    * Say you brought a Micky Mantle card for $1MM and sold it two years later for $2MM, you're probably a collector.

    To me, it is a question of intent.

    Hope this helps.
     
    LARRYH and readplays like this.
  20. Texas Forever

    Texas Forever Four Time F1 World Champ
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    * Here's the point of beginning. Non-business cars are "personal-use assets." This means you can't deduct a loss when you sell the car.

    * However, if you sell any asset, including a personal-use car, at a gain, you will have to report the gain. It doesn't matter whether it is vintage or not.

    * Because the personal-use car is not inventory or a business asset, the default for taxing the gain is the maximum 20% capital gains rate.

    * However, if you are a "collector," you may be subject to the higher 28% capital gains rate.

    * Adding "restoration costs," i.e., those that extend the useful life of the car, are capital expenditures and can be added to the taxable basis of the car in figuring the amount of gain.

    For example: say you sell a Maranello you brought for $125k for $75k. You can't deduct the $50k loss as a capital loss.

    But if you sell a 330 GTC you brought for $100k for $200k, you have to report the $100k as gain, most likely as a capital gain.

    Hope this helps.
     
  21. steved033

    steved033 F1 Rookie
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    so humor me. I think I"m following along, and possibly about to go through this with the GTX.

    I have a car I bought for 10k. I put 100k in and sell for 50k. I can't deduct the loss, but there's no capital gain. Right?

    sjd
     
  22. Texas Forever

    Texas Forever Four Time F1 World Champ
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    Assuming the $100k you put into it were "capital costs," i.e. extended the useful life, and not repairs, you should not have any gain.

    Ps You're among friends here. We won't tell your significant other about the $100k.
     
  23. steved033

    steved033 F1 Rookie
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    LOL!! it was full resurrection. It's basically a new old car now.

    sjd
     
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  24. fiatosca

    fiatosca Karting
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    How about sales tax from initial purchase? If I bought a car for $100K and paid 6% Michigan sales tax, does my cost position begin at $106K?
     
  25. donv

    donv F1 World Champ
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    Good luck with that one!
     

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