Sale of classic autos

[Zee]

I rent an office from a fee-based investment adviser. He prepares his client's tax returns for a nominal fee ($50), and also uses this to attract new business. I prepared a couple of his simple returns as a favor this morning since he charges me very little rent.

Later, we were talking about one of those clients. He said, "he knows how to make money." I said, "what do you mean?" He replied, "he buys & sells older classic cars." I asked if he reported the sales on his prior tax returns because he didn't provide any information on these sales for 2007. You know the answer, "no".

I explained that I would not have prepared and transmitted the return if he had provided that information. His answer was that he wasn't aware the profit needed to be reported. I asked how long he kept the cars before selling them. I wanted to learn if he drove them for a couple of years, then sold them. The answer was "yes". True? I don't know.

Frankly, I'm sure very few taxpayers report the gain on the sale of a personal automobile. But, at what point does it become a personal asset? Does driving it for a couple of years make it a personal asset? Or, in this situation, is it an investment asset? I think the cars are an investment asset since they are purchased with the intent to resell, or maybe a Schedule C.

What if you purchase an auto with the intent of driving it a couple of years and then selling?

The financial adviser indicated that the profits are quite large, $17000 on the last sale. I guess he's sold 3-4 in the last few years (whatever few means in this case).

I'm really po'd, that these facts were disclosed to me after the tax return was transmitted.

I'd appreciate some input from the TaxBook peanut gallery? Can anyone help?

[Matt Sova]

collectibles

The best case scenario that he could have is that they are collectibles that he held for 1 year or more. Of course they do not get the 15% LTCG rate, but rather ordinary income or 28% whichever is less.

[Zee]

The best case scenario that he could have is that they are collectibles that he held for 1 year or more. Of course they do not get the 15% LTCG rate, but rather ordinary income or 28% whichever is less.

I'm still not sure...how about a few more responses? Collectible? Schedule D long-term non-collectible? Schedule C?

In most cases taxation as a collectible would be less than the resulting taxes on the profit on a Schedule C because of SE tax, and I would think that might be the appropriate strategy. But, is an older car necessarily a collectible? Probably so. The definition isn't clear and only lists the following:

* stamps,
* coins,
* precious metals,
* precious gems,
* rare rugs,
* antiques,
* alcoholic beverages, and
* fine art.

However, I don't believe the list can be complete. What about antique violins, etc.?

We all know, that most individuals wouldn't report the sale of a personal automobile but most would be a non-deductible loss anyway based on the non-depreciated purchase price.

So, I'm still undecided whether this should be a regular long-term gain transaction, or not. I don't think Schedule C is appropriate since it doesn't seem to be a regular and continuing business.

[erchess]

My understanding is

that most sales of personal use autos are properly not reported because the cars are sold for less than was paid for them and personal losses are no deductible. My further understanding is that any time you sell something for more than you paid for it you report the gain as taxable income in one way or another depending on all the facts and circumstances. Therefore if your landlord is right, this guy has a deficiency. Given that your knowledge of the situation is based on hearsay, you might get away with not contacting your client to advise him of the problem and ask what he wants to do. I would personally still contact him. I would also get away from this landlord and I would certainly not do any more clients for him.

[Zee]

Usually cars that are appreciating in value are classic cars aka antiques. These are collectibles.

How is reporting on Sch C better than Sch D? If they are in the 15% bracket they will pay 15% on the Sch D income and 15% + SE tax on Sch C. Not only that, but I doubt that this guy runs this like a business. He probably does not have a car lot that he is operating. This is more than likely Sch D collectibles.

As far as the situation with the landlord and this client goes, I would contact the client and ask him about this income. Perhaps he is unaware of the tax consequences pertaining to this activity. I would advise him that he should probably amend the 07 return and if he does not want to I would let him know you will not do his 2008 return and note his file. The landlord may take issue with this, but if you explain it from your point of view with preparer penalties and such I think he will understand your position.

Matt-

My post wasn't clear. I understand a Schedule C would result in additional taxes and most likely exceed 28%.

I would also agree a classic car is a collectible and should be taxed at 28%. Matt, where is a cite on the 28% or the ordinary income tax rate (whichever is less) come from? I haven't read the whichever is less component. If I remember this guy was only in the 15% bracket.

I do plan on having the adviser contact his client to get more information on the classic car situation. If there was a 2007 sale, I'm going ask the adviser to get the purchase price, cost basis, and dates necessary to report the gain as a collectible. I'll then prepare a letter and mail it to his client with an amended return is.

[Davc]

All of the "special" capital gain rates are caps. You never pay more than what would otherwise be your marginal rate.

[Zee]

All of the "special" capital gain rates are caps. You never pay more than what would otherwise be your marginal rate.

OK, thanks. I've found the reference in TTB and other articles.

[les grans]

When you listed these as "collectibles":

* stamps,
* coins,
* precious metals,
* precious gems,
* rare rugs,
* antiques,
* alcoholic beverages, and
* fine art,

the only one you missed is "any other tangible personal property specified by the Secretary for purposes of this subsection" and - here's the interesting part - the Secretary has *not* specified any others, so that list is complete...!

Whether old cars are *ever* "antiques" as the term is used in this list is a question that's beyond me. My naive instinct tells me that "antiques" are furniture, but my friend at the IRS tells me they are whatever the auditor wants them to be.

[DaveO]

I've only reported one

It was the sale of an "off the frame restored" 1955 Corvette. The car sold for about $45K. The owner had all the records of the restoration plus the cost of having the car judged which added greatly to the value. By the time it was all added up he didn't have any where near the profit he thought he did. It was a real "I told you so" moment for his wife. At least the IRS can't tax the joy he had from owning and driving the car.

[Zee]

It was the sale of an "off the frame restored" 1955 Corvette. The car sold for about $45K. The owner had all the records of the restoration plus the cost of having the car judged which added greatly to the value. By the time it was all added up he didn't have any where near the profit he thought he did. It was a real "I told you so" moment for his wife. At least the IRS can't tax the joy he had from owning and driving the car.

I'm sure that's possible, but if the owner does the restoration themselves, the gain could be considerable. The adviser indicated his client said he made about $17000 (but his wife was with him).

Dave did you treat the transaction as the sale of a collectible subject to the special tax rates?

[DaveO]

I did treat it as Capital Gain at the special rates.

Dave did you treat the transaction as the sale of a collectible subject to the special tax rates?

The owner hired a restorer to do most of the work. I toyed with the "C" for a while since he has an impressive shop where he works on his regular cars. He has bought and sold old cars before but never made a profit on them.

His income was high enough to get clipped the 28% rate on the gain he did have. If the guy is doing all his own work it might be a business where you could deduct some tools and depreciate the shop. Problem is all the loss years. The guy who did the work insisted that he be paid in cash so I know how the other side of the transaction was reported.

[Burke]

I'm really po'd, that these facts were disclosed to me after the tax return was transmitted.
I'd appreciate some input from the TaxBook peanut gallery? Can anyone help?

Well, there is a lesson to be learned here. I had a like situation just recently, where an existing client asked if I would do her sister's return, and I said yes. So when she picked hers up, she dropped off the W-2 for her sister. Nothing else. Just a W-2. I picked up the phone and talked at length with the sister, garnering information like her marital status, DOB, other income, and so on and so forth just like I would do a new client, even though the sister had already given me this info. I wanted it verified from the taxpayer herself. Even over the phone, I felt uncomfortable not doing a face-to-face. I don't think I will do another one.