Collectors face special tax rules

Perhaps you love to collect antiques or you just inherited your
grandfather’s coin collection. When it’s time to sell or donate
those collectibles, you should be aware of a few IRS rules.
Perhaps you love to collect antiques or you just inherited your grandfather’s coin collection. When it’s time to sell or donate those collectibles, you should be aware of a few IRS rules.

Current tax law specifically excludes collectibles from preferable capital gains treatment. Generally speaking, the maximum capital gains rate is 20 percent for items held over one year. For collectibles, however, the rate is 28 percent (if your personal tax bracket is over 15 percent).

Say, for example, you bought an antique armoire 10 years ago for $2,000 and you sell it today for $7,000. The $5,000 difference between the item’s cost basis (the starting point for measuring any gain) and its sales price is the capital gain. That gain will be taxed at the 28 percent rate, so your taxes on the sale will be $1,400 ($5,000 times 28 percent).

One way to reduce your capital gains tax is to increase (or “step up”) the basis of your collectibles. For inherited items, that’s relatively easy. The basis of inherited property is generally stepped-up to its fair market value as of the date of the prior owner’s death. Let’s say that your grandfather bought his coin collection for $1,000 and it was worth $3,000 when he died. The collection is revalued to $3,000 upon his death. As a result, when you sell the collection, the gain and related taxes are less. Because of this more favorable tax treatment, it may make sense to leave your collection to your heirs instead of selling it during your lifetime.

For property donated to a qualified charity, you’re generally allowed a tax deduction for the property’s fair market value at the time it’s donated. But to get that deduction, you need to meet certain tests.

As always, it’s important to keep good records. If you’re thinking about selling or donating a collection and want help determining the tax consequences, give us a call. Log on to www.bianchi-lorincz.com to get more information on this and other important topics to assist you in making personal and business decisions.

-Barbara Andres is a CPA and partner with the accounting and business consulting firm of Bianchi, Lorincz & Co. in downtown Hollister and in Morgan Hill.

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