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.
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 2 of 4: Division of Assets
Part 4 of 4: Charitable Gifting
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