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Possible Tax Concerns For Collectors And Collection Owners

Collections and Estate Planning – Potential Tax Concerns for Collectors and Collection Owners

Part 3 of 4

Collections can grow organically or you may have a specific plan for acquisitions.  Between seeking out items, researching them, and connecting with others about the objects, you’ve likely spent a great deal of time—and probably money—on your collection over the years. Whether you do it for investment purposes or just for fun, your good eye may have picked out some items that have appreciated in value over time. It’s exciting when that happens. And it can also leave you with a big, unexpected tax bill. So, it’s important to know how to manage taxes on your collection.

Collectors and collection owners may have special tax concerns. When you collect items of value, they may appreciate over time. This could be welcoming news; you made a good investment! However, if you don’t plan for the tax implications of that value increase, you may find yourself facing unexpected tax consequences.

In a previous blog, we discussed the various options that every collector has when deciding how to incorporate their collection within their estate plan. A key factor in making those decisions is understanding the value of the collection and any tax implications its bequest or sale might have. In general, collectors need to understand two types of tax explained below.

Capital Gains Taxes

You loved that antique roadster you picked up a dozen years ago. And it’s been fun to drive. It’s also worth a lot more today than when you purchased it. So, if you sell it, you will owe capital gains taxes on the profits. In 2020, the long-term capital gains tax rate on collectibles is 28%. This is higher than the long-term capital gains rate on other assets, such as stocks, which is typically 15% or 20% depending on your tax bracket.

If, on the other hand, you are in a position where some pieces decreased in value and will be sold at a capital loss, then you can use the losses from the sale of your collection to offset an equal amount of capital gains tax. The key here is that the collectible must be an investment (as opposed to personal use property). Additionally, you can deduct up to $3,000 of excess capital losses against your ordinary income. In this regard, capital losses in your collection are no different from capital losses in your investment portfolio.

Estate Taxes

The majority of assets held directly in your name, including your collection, will be part of your taxable estate upon your death. This means that your heirs will inherit your collection with a stepped-up cost basis. If you decide to gift your collection during your lifetime, then the cost basis will carry over to the recipient.

Your estate will be required to pay estate taxes if the net value is greater than the exemption set by Congress. Currently in 2020, the estate tax exemption is $11.58 million per individual as a result of the 2017 Tax Cuts and Jobs Act. However, these tax cuts are due to expire at the end of 2025 and the estate tax exemption will revert to pre-2018 levels ($5.5 million, adjusted for inflation), unless Congress acts.

Whether or not you have an estate tax issue today, you might in the future due to asset accumulation and/or changes in the law. This is where annual gifting and other estate planning strategies can be effective in managing tax liabilities.

If you do end up having a taxable estate at your death, then your heirs may need liquidity to pay for any taxes owed on the value of your collection. Estate taxes must be paid within nine months of death (without any extensions). Proper planning now can ensure that your heirs are prepared for this and avoid any fire sales. Every collector and their family will have their own income and estate tax planning scenario based on the size and value of their collection and their overall estate. Be sure to discuss your collection with your RegentAtlantic Wealth Advisor and tax professionals to help find the best possible strategy or you.

Part 1 of 4: How Your Collections and Collectibles Affect Your Estate Plan

Part 2 of 4: Division of Assets

Part 4 of 4: Charitable Gifting

Important disclosure information

Please remember that different types of investments involve varying degrees of risk, including the loss of money invested. Past performance may not be indicative of future results. Therefore, it should not be assumed that future performance of any specific investment or investment strategy, including the investments or investment strategies recommended or undertaken by RegentAtlantic Capital, LLC (“RegentAtlantic”) will be profitable.

Please remember to contact RegentAtlantic if there are any changes in your personal or financial situation or investment objectives for the purpose of reviewing our previous recommendations and services, or if you wish to impose, add, or modify any reasonable restrictions to our investment management services. A copy of our current written disclosure statement discussing our advisory services and fees is available for your review upon request.

This article is not a substitute for personalized advice from RegentAtlantic. This article is current only as of the date on which it was sent. The statements and opinions expressed are, however, subject to change without notice based on market and other conditions and may differ from opinions expressed in other businesses and activities of RegentAtlantic. Descriptions of RegentAtlantic’s process and strategies are based on general practice and we may make exceptions in specific cases.

RegentAtlantic does not provide legal or tax advice. Please consult with a legal and or tax professional of your choosing prior to implementing any of the strategies discussed in this article.

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