12 tax tips for collectors
By Dana Dratch • Bankrate.com

While collectors can offset their profits with certain expenses after a sale (like appraisals and restoration costs), investors have wider latitude and could potentially annually write off some of the maintenance and upkeep of their investments, says Thompson.

That could include things like insurance, special storage, investment advice and other costs associated with collecting and maintaining the investment.

So how do you correctly define your collecting status?

The government looks at a host of factors, says Ralph Lerner, co-author of "Art Law: The Guide for Collectors, Investors, Dealers and Artists."

"It's a facts-and-circumstances test," he says. "You look at all the facts."

While no one factor will decide the issue, together they paint a portrait of the collector's motivation. Some points the government will consider:

• What kind of books and records do you keep? (Shoebox full of stained receipts -- collector.)
• Do you consult outside financial advisers?
• What is the expertise of your advisers?
• What is the manner in which you carry on the activity? (An investor tends to take a more business-like approach, says Lerner, a partner in the law firm of Sidley Austin Brown & Wood LLP.)
• How much time or effort do you expend? (Investors tend to invest large chunks of time, collectors less so, says Lerner.)
• Is there an expectation that the assets used may appreciate in value?
• What is your track record with similar activities for profit?
• What is your mental state?
• What is the history of profit and loss with respect to this activity?
• What is your financial status? (Lower income people have an edge, says Lerner. The lower your income, the greater your risk, and the more likely your collection could be an investment.)
• And what are the elements of personal pleasure or recreation involved? (If you buy it because you like it, you're a collector, says Lerner. If you buy it for the value, you're an investor.)

But, just to make it more confusing, no one item alone will decide the issue, says Lerner. The best you can do is use the list to determine how you see yourself, then talk to your own tax specialist.

And if you ever decide to turn your hobby into a side business and become a dealer, that's a whole different set of rules and paperwork.

7. Keep great records
When did you buy an item? What did you pay? Where? From whom? How much have you spent improving it? Have you paid for professional advice or appraisals? Depending on what you collect, and your status as a collector, you might not be allowed to offset everything, but it's a lot easier to ask when you've got good records and all your receipts. "If you don't have records, you're dead," says Lerner.

And don't worry if you don't know how. "It doesn't have to be an elaborate ledger," says Jack Kelly. "Just keep track, on a running basis, of what it costs to acquire an item, the condition it's in, the provenance -- and you also need to keep good records in case it turns out to be a counterfeit piece or less than it was advertised to be."

Make sure the ownership is clear from the beginning, says Edelson. "Does the invoice say Mr. or Mr. and Mrs.? If the item is jointly owned, the invoice should say that."

Scott A. Travers, author of "How to Make Money in Coins Right Now," advises collectors to buy by check when possible, which creates an instant record of the purchase. And don't forget that receipt. While that may seem like a no-brainer, he says, some coin dealers don't routinely do it.

Instead, Travers says, get something detailed that includes a description of the item and any serial number, the quality of the item, the names of the buyer and seller, the price and the date.

"Create a paper trail and do things right and you can use the system to your advantage," he says.

8. How did you get the item?
If you inherit an antique chair from your Aunt Tillie, you'd be hard pressed to call it an investment, says Tom Napier, CPA, of Portland-based Napier & Company. On the plus side, there are some tax laws that could help you with capital gains on inherited pieces.

First, you don't have to keep inherited property a year to reap the benefit of long-term capital gains rates, says Thompson. The minute the piece passes into your hands, the government will treat it like you've had it for a year and allow you to take the long-term capital gains rate on any profit you make from its sale.

Second, when you do sell the item, you only pay capital gains on the amount it's increased in value since you received it.

9. Who's going to take this stuff when you're gone?
Short of a doublewide plot or a funeral pyre, you really can't take it with you. And if your collection is truly valuable, you might want to think about gifting some of your collectibles ahead of time.

But a collection tends to be more valuable as a unit, so "how do you dispose of it in a way that makes sense from a business standpoint," says Jack Kelly.

The downside: If the giver is alive, he passes on his capital gains obligations, says Musgnug.

If Aunt Tillie gives you a $1,000 antique chair she picked up for $2 in 1929, you'll owe capital gains on $998 when you sell it. "It's a double-edged sword," he says.

10. You can give generously
Consider giving collectibles to charity. Donations are exempt from capital gains. Instead, you receive a deduction for the fair market value of your items.

The downside: To claim the deduction, you have to itemize. And the donation has to meet certain criteria, says Musgnug: The charity must be IRS-approved and the item given must be related to the charitable purpose. Also, if the item is worth more than $250, get a receipt; for more than $500, be able to substantiate the value; and for more than $5,000, you need a qualified appraisal.

11. Consider like-kind exchanges carefully
True investors are allowed to trade similar items of equal value tax-deferred, provided they abide by strict rules and fill out the proper paperwork, says Lerner. "But there is a risk involved in doing that," he says. "You bear the burden of proving you are an investor."

These exchanges are extra tricky when they involve relatives, says Thompson. If a family member sells the exchanged goods within two years, whether they tell you or not, your half of the trade is immediately subject to capital gains tax.

12. Get professional help
It can pay off to run collecting questions past your CPA or tax attorney. And listen to your gut. If you know you don't really qualify for a certain deduction or special status, don't take it.

Dana Dratch is a freelance writer based in Atlanta.