Calculating capital gains on an inherited classic car

Karin Price Mueller/The Star-Ledgerwrites: Q. I inherited a classic car when my father passed. In the estate, four years ago, the value was $6,000. It’s now worth $50,000, and the title is in my name. Do I have to pay capital gains tax if I sell the car? I was told I’d only have to pay if the car was worth $100,000 or more. If I do have to pay, can I get around it somehow?

Answer: It seems you may have received some misinformation about the first $100,000 of capital gains potentially being excluded from your income.  Before we get to your final answer, it’s important to know a few items.  First, why did the car increase in value so significantly over four years?

If you invested money in fixing it up and restoring it, thereby increasing the car’s value, the car’s basis would not be $6,000, but $6,000 plus any improvements you made to the vehicle, said Michael Maye, a certified financial planner and certified public accountant with MJM Financial in Berkeley Heights.

"Another possibility is that the car was not appraised or valued correctly for estate tax return purposes," Maye said. "Doing so would have understated the decedent’s estate for estate tax return purposes."  But, Maye said, an estate tax return, known as a Form 706, is unfortunately not amendable like a personal income tax return is.

That means if you didn’t make improvements, the car is probably stuck with the $6,000 basis from the estate return, Maye said.  Plus, vintage cars are classified as collectibles for capital gains purposes.

"As a result, any capital gain from the sale of this vintage car is taxed at collectible capital gains rates which can be as high as 28 percent," he said. "For comparative purposes non-collectible capital gains are taxed only at zero percent, 15 percent or 20 percent, depending on the person’s level of income."

And, Maye said, assuming you live in New Jersey, you’re in for another tax bite.

"He would owe ordinary income taxes as the state has no preferential capital gains rate," he said.  Check with your tax preparer to make sure you get proper appraisals for the car before you decide to sell.  And take one more nice spin. Bet your dad would have liked it that way.