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When I was in high school, my father-having just had a heart attack-gifted me a classic automobile. This year, he passed away and I ended up selling the car. (The car has been in my name now for roughly ten years.) It sold for $22,000. My question is the following: how does this affect me for taxes early next year? A friend of mine said it should have no effect since my adjusted gross income is under $20,000. That is, I won't pay much on capital gains with an income so low. Can anybody confirm and/or explain this situation a bit further? Thank you! I live in PA.

Ben Miller
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36olds
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1 Answers1

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I'm guessing PA means the Commonwealth of Pennsylvania.

In the US, it may so be that your classic automobile is considered a collectible. Long term gain on sale of collectibles is taxed at the maximum 28% rate (see here for the IRS tax topic on this). This is regardless of your AGI. The 0% long term capital gain rate doesn't apply to collectibles.

The distinction between regular and collectible long term gains goes on your schedule D and form 8949 where you mark this sale with code "C" (see instructions here).

You need to figure out what was the adjusted basis of the car to your father when it was gifted to you, as you only pay taxes on the gain, not your father's investment into the car (buying, repairing, rebuilding, painting, maintaining, etc).

I think your father should have filed a gift tax return for this gift where the adjusted basis and the gift tax paid (which is added to your basis) would be reported, but if he didn't - you'll have to somehow figure it out (with sufficient documentation to show the IRS, of course, not just make a number up).

If your car is not classified as a collectible, you'll pay the regular long term capital gains tax, which at the lowest bracket is indeed 0%.

Consult with a tax adviser (EA/CPA licensed in your state) about your specific situation.

littleadv
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  • Thank you for the advice. I have absolutely no idea about the value of the car when it was sold to me. I was a kid. Moreover, I have zero documentation. What do you suggest I do? Thanks. – 36olds Dec 15 '13 at 05:59
  • @36olds check your father's old documents and see if there's a gift tax lying around somewhere. Talk to his then-tax adviser or tax preparer who might know anything for that time. If not - check with your local classic cars' club about how to figure out the value retroactively, these people usually keep tabs on values of classic cars and can tell you how to figure it out. – littleadv Dec 15 '13 at 06:01
  • Thank you.:) Now, this may be an odd question but have I done anything wrong? I needed to sell the car. I had no place to store it. Also, I will be returning to school and hopefully part of the profits I made will defray some costs. If I show up to do my taxes with very little documentation, am I going to walk out in cuffs or something? – 36olds Dec 15 '13 at 06:06
  • I should note: the person I sold the car to sold it for $35000- which is what my father told me its worth. In other words, I could have sold it for much more. – 36olds Dec 15 '13 at 06:08
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    So why did you sell it for such a low price? Is that person related to you in any way? It may be considered a gift... – littleadv Dec 15 '13 at 06:10
  • If you show up with very little documentation you'll be stiffed with a tax bill on 22K collectibles gain, which means you'll have to pay more than 6 thousands in taxes – littleadv Dec 15 '13 at 06:11
  • Foolishness. There is no other word for it. And, no, I did not know the man. – 36olds Dec 15 '13 at 06:11
  • So as not to get stiffed with an enormous tax, what do I need to find/bring? – 36olds Dec 15 '13 at 06:14
  • As I said - reliable and documented valuation of your car at the time it was gifted to you. Or a convincing evidence that it was not a collectible (which I seriously doubt its existence). – littleadv Dec 15 '13 at 06:47
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    @littleadv - a gifted item doesn't get a basis bump. I gift you a stock I bought for $5000. It's worth $10,000 when I gifted it, but now worth $20K. Your basis? My same $5000. Not $10k. – JTP - Apologise to Monica Dec 15 '13 at 12:35
  • @36olds did your dad give you the car or sell you the car. You use one phrase in the question and the other in a comment. – mhoran_psprep Dec 15 '13 at 13:06
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    Well, I searched the few documents that we didn't throw out after his death and found nothing. To answer your question, I don't know if I purchased or it was gifted. Like I mentioned, I was in high school. I remember going to some office to transfer the title. Maybe I purchased it for some very low price. I am not sure. My dad restored the car and probably put $20000 into it. But that was obviously his money, not mine. Let me get straight though: if I walk in there with no documentation, I get taxed about $6000? That's the worst case scenario, right? It won't be over 28%? – 36olds Dec 15 '13 at 13:16
  • Yes, that's the worst case scenario – littleadv Dec 15 '13 at 19:33
  • @Joe you're wrong, gifted items get basis bump for gains, they don't get basis bump for loss. So if I bought a stock for 5K, give it to you when it is worth 10K - you have gain basis of 10k and loss basis of 5K. if you sell it at 7K - no tax effect. At 12K - 2K gain. At 2K - 3K loss. – littleadv Dec 15 '13 at 19:34
  • @littleadv - Please cite a source. Gifting appreciated stock to charity is great. Gifting to another individual does not get a bump in basis. That only happens on death. I am certain of this fact. Else, instead of gifting all my friends $14K each year in cash, I'd just gift them my oldest, most appreciated stock. That would cool if it were the case, but the basis follows. – JTP - Apologise to Monica Dec 15 '13 at 19:42
  • @Joe I was wrong, apparently. What I thought is always happening, is only happening if FMV is less than the gifter's basis, which is probably not the case here. So for the OP the basis would be his father's basis + gift tax paid. See here: http://www.irs.gov/publications/p551/ar02.html#en_US_2010_publink1000257001 – littleadv Dec 15 '13 at 19:44
  • In any case, gift tax is charged on the FMV, so gifting the most appreciated stock will subject you t 35% tax on its value (not gain!), not a good idea. – littleadv Dec 15 '13 at 19:45
  • @36olds see my updated answer after Joe's correction. – littleadv Dec 15 '13 at 19:48
  • @littleadv - no problem. The confusion speaks far more to how convoluted our tax code is, than to either of our expertise. – JTP - Apologise to Monica Dec 15 '13 at 19:58
  • @joe not only convoluted, but also unfair. gift tax is added to the basis, not credit to tax, so there's double taxation hiding in there as well. – littleadv Dec 15 '13 at 20:20