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Collectibles and the Taxpayer Relief Act of 1997

Are lower taxes for capital gains tempting you to sell that antique grandfather clock? The Taxpayer Relief Act of 1997 excludes items like collectibles from favorable capital gains treatment.

This tax tip discusses the tax treatment of collectibles gains or losses. A collectibles gain or loss is the gain or loss generated by the sale of a work of art, rug, antique, metal, gem, stamp, coin or alcoholic beverage held more than one year. After discussing the difference between short-term and long-term gains, the tip explains the process for reporting a capital gain or loss. Strategies for avoiding or minimizing taxes on collectibles are also suggested, specifically addressing the tax treatment of inherited collectibles.

Capital gains rates
Collectibles include art, rugs, antiques, stamps, coins, metals, gems and certain other tangible property. Before the Taxpayer Relief Act, collectible gains were subject to the long-term capital gains rules. However, the 1997 law specifically excludes gains from collectibles from the new lower long-term rates.

How does this rule change affect the taxes due on your collectible gains? The table below clarifies this tax treatment by differentiating long-term capital gains from short-term capital gains.

Capital gain
Length of time item was held
Tax rate applied to gain
Short-term One year or less Same income tax rate as ordinary income
Long-term More than one year 15% for taxpayers in the 15% income tax bracket;

28% percent for other brackets.

Short-term gains are gains on items held for one year or less. These gains are taxed at the same income tax rate of ordinary income, ranging from 15 percent to 39.6 percent. Long-term gains are gains on items held more than a year. These are taxed at one of two rates, depending on the taxpayer's income bracket. If the seller is in the lowest income tax bracket of 15 percent, the gain is taxed at 15 percent. Gains are taxed at 28 percent for sellers in any bracket more than 15 percent.

Reporting collectible gains
Report gains from collectibles in a manner similar to other capital gains. Capital gains and losses are reported on Schedule D of Form 1040. Enter in column (g) the amount, if any, from column (f) that is a 28 percent rate gain or loss. Enter any loss in parentheses. You should refer to Chapter 17 of IRS Publication 17: Your Federal Income Tax for additional information.

Strategies for minimizing taxes
A taxpayer holding collectibles that have appreciated in value may wish to consider several courses of action. If financial reasons force an immediate sale of a collectible, the resulting gain won't qualify for the new capital gain rates. However, if these assets don't have to be sold immediately, hold on to them. If this exception is repealed in the near future, the new rates would apply. If at all possible, the taxpayer shouldn't sell the collectibles in his lifetime. Passing them through his estate will generate tax benefits for the heirs.

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Heirs receive tax benefit
How do heirs benefit if you pass the collectible through your estate? Selling an inherited property "steps up the basis" when they calculate the gain on the sale of this property. The seller's basis is the property's fair market value on the date of the decedent's death. The taxable gain will be the difference between the seller's basis and the sales price. Have you recently inherited collectibles that you are considering selling? You could entirely avoid capital gain by selling them shortly after the decedent's death. Since the sales price, which is the fair market value, would equal or at least be close to his basis, your gain would be minimal if any.

Purchase price of collectible
(date)
Sales price of collectible
(date)
Capital gain
(Sales price - Purchase price)
$5,000
(Aug. 31, 1975)
$30,000
(Aug. 31, 1998)
$25,000
Taxpayer's income tax bracket
Tax due on collectible gain
(Capital gain x tax rate)
28%
$ 7,000

Confused? The tables and examples clarify the tax benefits of passing collectible items through your estate instead of selling them.

Example 1: Taxes due on a collectible gain.

A single taxpayer purchased a piece of art in 1975 for $5,000. She sells the art on Aug. 31, 1998, for $30,000. The difference between the $30,000 sales price and the $5,000 purchase price is her capital gain of $25,000. Assuming she is in the 28 percent income tax bracket, taxes due on this long-term capital gain would be $7,000 ($25,000 x 28 percent).

Example 2: Taxes due on sale of recently inherited property.

Fair market value of collectible
(date)
Sellers' basis
(Fair market value of collectible on taxpayer's death)
Sales price of collectible
(date)
$30,000
(Sept. 15, 1998)
$30,000
$30,000
(Dec. 15, 1998)
Capital gain
(Sales Price - Basis)
Tax due on collectible gain
(Capital gain x tax rate)
$ 0
$ 0

Now assume that she doesn't sell the art but instead passes it on to her heirs. On Sept. 15, 1998, the date of her death, the art has a fair market value of $30,000. Her heirs sell the art on Dec. 15, 1998, for $30,000. Since the sellers' basis equals their sales price, the sale doesn't realize a gain. The sale didn't result in a capital gain, so there aren't any taxes due!

Conclusion
The Taxpayer Relief Act of 1997 excluded items like collectibles from favorable capital gains treatment. This tax tip discusses the tax treatment of collectibles gains or losses.

After explaining the difference between short-term and long-term gains, this tip clarifies the process for reporting a capital gain or loss. Strategies for avoiding or minimizing taxes on collectibles are also suggested, specifically focusing on the tax treatment of inherited collectibles. The best course of action, if financially feasible for the taxpayer, is to hold on to these assets through his lifetime and pass them to his heirs, who will be able to minimize or eliminate any gain on these items.

--Nov. 1, 1999

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