Everyone has their opinion about where the collector-car market is headed, and no one can honestly claim that their crystal ball is clearer than anyone else’s.
“Legal Files” won’t claim to know more about the market than the real market experts, whose words appear on other pages of this issue. But conducting a legal practice in the collector-car arena puts us in touch with a variety of market players, leading to what may well be useful insights for consideration.
Multiple forces
Strong forces are pushing the collector-car market right now:
- Most of the collectors holding large collections — important ones and more-modest ones — are in their 60s, 70s and 80s. This group has had a great run at the collecting hobby, but their annual driving hours are down, they are often looking to simplify their lives, and they are downsizing. Their collections represent a substantial asset value in what may well be a mature market. Put that all together, and it is inescapable that these collectors are looking to sell some or all of their cars. They aren’t buying more of them, except in a last-ditch effort to get something they’ve always wanted before it’s too late.
- Younger buyers are entering the market, of course. But you’ve read many times in SCM that people buy cars they lusted for in their youth but could not afford. So the younger buyers are buying different cars than the older sellers are selling.
- We are in the midst of a global pandemic that has kept us home and out of our cars. Opportunities to drive our collector cars have become even more limited.
- The pandemic has triggered a major recession, depressing all markets.
Any honest collector car dealer will tell you the same story. Cars are still selling, but everyone is looking for a bargain. If it isn’t discounted, it’s hard to sell.
It is definitely possible that we will soon find a cure — or a vaccine — for COVID-19, everyone will get back to work and business will go back to where it was a short forever ago. While that would make everything happy again, I don’t know anyone who is betting on that.
Indications are the collector-car market is in for a tough ride. If that is the future, there are a number of things to be aware of, from a legal point of view.
Buyer complaints
Lately our practice has seen an increasing number of disgruntled buyers bringing claims against sellers for misrepresentation.
If you’re the seller, you think the buyer is just making up reasons to avoid the unexpected loss on the car. If you’re the buyer, you know that suing the seller isn’t easy or cheap. However, without a rising market to offset the overpayment on the car, you need to take legal action to remedy the seller’s deceptions about the car.
Whatever the motivation, we are seeing more buyers trying to force a seller to buy the car back. In some cases, the buyers are willing to eat the additional investments they made in the form of improvements to the car. They just get their purchase money back.
This is a double whammy for the seller. Buying back a car at yesterday’s price just locks in a loss when you resell it at tomorrow’s price.
Chasing ghost sellers
If you are the buyer trying to get your money back, you are going to find out if you bought from the right seller. Many dealers are capable of going bankrupt if necessary. Pressing a large rescission claim may be all it takes to push them over the edge.
We just handled a claim where there were serious misrepresentations about the car. The dealer was also lied to — and was just as much a victim. However, the dealer, a corporation, had filed bankruptcy before the claim materialized.
Ordinarily, you sue the dealer, he sues whoever sold him the car, and on back up the line. But in this case, we had to leapfrog the dealer and make claims against his seller, which presented huge obstacles.
Essentially, we were putting ourselves in the dealer’s legal shoes. That meant we had to contend with different statutes of limitation, different contract terms, different defenses and so on. We also had to contend with differences in jurisdiction, depending upon where people in the ownership chain resided.
It didn’t take long before our client wished he had bought a car from a more substantial dealer.
Insurance claims
We just concluded a very surprising insurance claim. The car was a concours-level Porsche 911. The insurance company was a very reputable collector-car specialty carrier that has always been very easy to deal with on claims.
The damage was not all that severe from the standpoint of your typical consumer insurance company, but all of us hobbyists would readily recognize that the Porsche was a total loss.
To my surprise, the insurance company insisted on repairing the car even though it was impossible to make a proper repair without sending it back to the factory. The adjuster also refused to repaint the entire car, even though the metallic paint was going to be impossible to match.
It was only after we threatened a massive diminished-value claim that the adjuster brought in an appraiser to advise them on that exposure. Luckily, they retained a capable appraiser, and the Porsche was totaled.
While that is just one example of a difficult case, it may be a sign of things to come, as it seemed to be totally out of character for this insurance company.
Fraudulent cars
We are seeing an uptick in buyers discovering that their cherished collector cars are fakes. That is not really a result of today’s tough business environment.
Rather, it is a product of the huge run-up in collector-car values over the past decade, which created tremendous financial incentives for unscrupulous sellers to create cars to fill a seemingly insatiable demand. It has just taken this much time for the buyers to discover what they actually bought.
Taxes may go up
The U.S. government recently spent over $2 trillion it didn’t have on stimulating the economy, and it may not be through with the stimulus. Meanwhile, we have a severe recession that will reduce tax revenues and increase deficits.
Will any of this ever have to be paid back?
At some point, the answer becomes “yes.” Nothing will happen before the election, but many think income taxes will be going up next year.
Today’s tax rates look pretty good. Gains on the sale of collector cars are capital gains. If you’ve owned the car for over a year, it’s a long-term capital gain with a maximum federal tax rate of 20%. You have to add the 3.8% net investment income tax on top of that, but that’s the lowest federal tax rate you are ever going to see.
If you believe that tax rates will be going up, then the smart move is to sell this year. But, of course, that may mean you are selling into a declining market. If you think that, the smart strategy is to sell quickly, before things get worse.
However, if everyone reading this puts all their cars up for sale right away, the market will decline faster. So maybe we should draw straws to space it out.
Either way, you need a clear crystal ball to make the right decision. If tax rates go up — but the collector-car market rebounds — you might come out better selling later at a higher price even though you pay more tax.
On the other hand, if tax rates go up and the market still declines, then you are better off taking what you can get today.
Estate taxes
We currently enjoy an estate-tax exemption of about $11.6 million. A married couple can double that amount. Under current law, the exemption drops back to about $6 million in 2026. The obvious strategy has been to use the full exemption before it goes away.
Recently, talk has been that these large exemptions are going to come down dramatically next year. Many people think that could happen if the Democrats take over the federal government in the national election this November. However, the talk now is that the exemption will drop dramatically no matter which party wins the election.
This may well be the year to use whatever exemption you have. Should you use it to move ownership of your cars to your kids?
Keep in mind that the best asset to give to your kids is one that will continue to appreciate in value. That shifts the most wealth. The worst asset to give is one that will decline in value. That way, you effectively waste some of your exemption. Are your cars good candidates for this type of planning?
Times are changing. You need to know that. You need to decide which way they will change. Then, you need to act accordingly. Just don’t wait too long. ♦
John Draneas is an attorney in Oregon. He can be reached through
www.draneaslaw.com. His comments are general in nature and are not intended to substitute for consultation with an attorney.