Wondering how many actually do/claim this. I'm not sure if I've ever made money on my cars, so it's not really a concern for me. But I'm sure someone has turned a profit somewhere. Any tax experts have some ideas about this process?
Curious minds, et cetera, et cetera....
I'm no tax expert (nor have I ever come close to making money on any car I've sold), but it will likely depend on a couple of things - is flipping cars an actual business for you? How much profit are you talking about?
Short answer...technically yes you have to claim profits on sale of an asset. But many factors come into play: is flipping cars your primary business?, how long you owned it, what did you spend on improving it (routine maintenance excluded), etc.
Typical IRS unfairness you generally can't claim losses on sale of personal property as a deduction.
The above being said how is IRS going to know what you bought and sold it for?....ymmv.
I have sold cars for more than I paid for them. Usually only a couple of thousand dollars. I have never claimed it. I figure I have enough receipts for all the cars I have to fight any challenge that I only broke even. if we are talking much more than 10k I would be getting professional advice.
This is one where unless it is a business or a HUGE profit, I'd take the risk and say that the IRS has bigger fish to fry.
The recent CM has an article that addresses this, and they hint at the tax issue in a couple ways:
I would echo everything said here so far, but would emphasize my number 3 above.
Just factor tax consequence into your pre-sale thinking, not your post-sale thinking.
If you're fixing and flipping cars rapidly, then it's likely you would technically owe taxes on the profit. But if you're holding the cars for a while, I bet you could come up with enough receipts to say you at best broke even. Any tools you bought while owning the car? Oh yeah, that was to work on the car. Gas, oil, cleaning supplies, tires, garage supplies, etc.. you get the idea. I'd hate to have to come up with that paperwork though.
The smartest option is to make sure the government knows the bare minimum legally required about your money.
Just write a number equal to, or less than, the number you originally paid for it on the transaction paperwork. No income tax for you and less sales tax for the buyer. It's a win-win.
...Just kidding.
...Sort of.
In reply to Robbie:
Your worry about #3 is a bit exaggerated...assuming you had it for a year, it would be a long term capital gain which has a maximum tax rate of 15%, depending on you tax bracket.
In reply to dculberson:
Nope. Routine maintenance items, gas, oil etc. are not allowed to adjust your cost basis.
Not tools, either. This is the U.S.GUBMINT..
NOT THE $2017 CHALLENGE
Ovid_and_Flem wrote: In reply to Robbie: Your worry about #3 is a bit exaggerated...assuming you had it for a year, it would be a long term capital gain which has a maximum tax rate of 15%, depending on you tax bracket.
Fair enough, I'm no CPA!
I was, however paraphrasing from memory from the article. Just went back to check since I have the mag right here, and at least I nailed the paraphrase. (July 2017 classic Motorsports pg 83).
Edit: #humblebrag
In reply to Robbie:
CM...where I go first for tax advice.LOL
Realistically we're talking about hypothetical first world problems here.
CAVEAT: I promised my tax law professor I would never practice tax law if she would give me a "C"...she did so I don't.
Ovid_and_Flem wrote: In reply to dculberson: Nope. Routine maintenance items, gas, oil etc. are not allowed to adjust your cost basis. Not tools, either. This is the U.S.GUBMINT.. NOT THE $2017 CHALLENGE
I will concede that I do not know the ins and outs of the tax code very well. What if you were treating it as a business (sole proprietorship) could you deduct money spent to operate that business from the income? (Not to the point of writing off losses to offset other income, just reducing the profit.)
In reply to dculberson:
Certainly. And if a true business you could write off a lot more....business cards, phone bills, utilities, etc, etc, etc. You name it...depends on how sharp your accountants pencil is. And if it were a bona fide business venture you could declare losses against other income.
What I took the OP query as was a hobbyists or enthusiasts sale. In that case a car would be a personal capital asset. And windfalls related to a sale of such assets are subject to capital gains taxes. But as someone else opined the IRS probably has bigger fish to fry.
FUN HYPOTHETICALS Since few of us sell cars more than we have in them. Illustrates how goofy IRS can be.
Hypothetical #1: Your favorite eccentric uncle purchases a Ferrari Datona 40 years ago for $10,000, locks it away in a climate controlled vault unbeknownst to anyone. On his deathbed he calls you in and hands you the signed title and dies.
Hypothetical #2 Same scenario as above but leaves it to you in his will. Car is value at $4 million on the day he dies.
In both You decide you can't afford upkeep so you immediately sell it the day after his funeral.
Tax consequences of sale:
In #1, since he gave it to you before he died you must start with the cost basis when he bought it. So you would owe taxes on $3,990,000.00. ($4 million less his $10k original purchase price).
In #2, you would get a "stepped up" basis on the value at the time of his death so you would owe no capital gains taxes.
Back to your regularly scheduled programming.
Document what you spent on the car, time and money, to make it better than when you got it, and don't claim the profit.
Ovid_and_Flem wrote: FUN HYPOTHETICALS Since few of us sell cars more than we have in them. Illustrates how goofy IRS can be. Hypothetical #1: Your favorite eccentric uncle purchases a Ferrari Datona 40 years ago for $10,000, locks it away in a climate controlled vault unbeknownst to anyone. On his deathbed he calls you in and hands you the signed title and dies. Hypothetical #2 Same scenario as above but leaves it to you in his will. Car is value at $4 million on the day he dies. In both You decide you can't afford upkeep so you immediately sell it the day after his funeral. Tax consequences of sale: In #1, since he gave it to you before he died you must start with the cost basis when he bought it. So you would owe taxes on $3,990,000.00. ($4 million less his $10k original purchase price). In #2, you would get a "stepped up" basis on the value at the time of his death so you would owe no capital gains taxes. Back to your regularly scheduled programming.
As long as the uncle doesn't have $1.43m in other assets, because then estate taxes would come in to play.
In reply to Enyar:
Yep. My mother is going this right now after her husband died and left her with a few times of value, including a 2014 Kia Soul and a '73 Kawasaki H1 with less than 4000 miles (but hasn't moved under its own power since 1974). While determining the estate value of the car was fairly easy, trying to determine the valve of a somewhat obscure 44 year old motorcycle has been fun.
Sell it through a subsidiary company in Nevada or Ireland? That's what the tech companies do
Ian F wrote: In reply to Enyar: Yep. My mother is going this right now after her husband died and left her with a few times of value, including a 2014 Kia Soul and a '73 Kawasaki H1 with less than 4000 miles (but hasn't moved under its own power since 1974). While determining the estate value of the car was fairly easy, trying to determine the valve of a somewhat obscure 44 year old motorcycle has been fun.
I thought there was no estate taxes or probate to go through with a spouse passing away.
Sorry to hear about your mother's husband. (FIL?)
Yes, I also read where you can't claim the losses on sales of cars. (I can fully understand that one! Just imagine that mess!). I suppose you could claim your "shop time" or other such time against the value if push->shove. (I have 200 hours @ $50/hr in that car). Or am I off base on such a thing?
(thanks O&F for your insights!)
In reply to stan:
Sorry...off base as far as your shoptime.
Ovid_and_Flem wrote: In reply to stan: Sorry...off base as far as your shoptime.
??
In reply to stan:
If you were paying a shop $50 an hour to improve the value of the car you could obviously claim it as applying towards the basis. But if you are claiming the sweat of your brow and your uncompensated time, I think that would be iffy.
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