Is It Time to Sell?

As most SCMers know, the collector-car market is way up, we are likely in a transition period for taxes, and we are getting older. All things end. Is it becoming the time to consider how we phase out of car collecting? Let’s consider the various forces that may or may not be affecting that decision.

The market

When the pandemic hit in 2020, many had so little to do that they filled the time by buying cars, frequently online. Bring a Trailer experienced explosive growth, and an ever-increasing number of competitors have since launched. Brick-and-mortar auction houses jumped into the fray as well. They aren’t making more collector cars, so prices have shot upward dramatically.

These are known facts. But from a market perspective, the real question is what is going to happen next. Not to be overly simplistic, but there are three likely results:

• The market is overheated and is going to drop.
• Normal market growth just accelerated slightly. It will plateau or drop back a bit, then continue on its previous long-term trajectory.
• The COVID-19 experience is making us rethink what is important in life. The past two years are a correction that will not revert. The market will keep going up.

Fine-tune the picture in your crystal ball as you wish. But whichever way you think the future is going to develop, you have to recognize that we all have a lot of unrealized gains on the table right now.

Buyers are older and younger

Today’s buyers fall into two groups — the Baby Boomers, and everyone younger (Gen Xers and Millennials both). For the past few decades, the collector-car market has been driven by the Boomers and their parents’ generation. But this segment of the market is aging out; Boomers are now 57–75 years of age. While the youngest are still buying cars, the oldest of them, as well as their parents’ generation, are in the disinvestment phase of their collector-car lives. That means there will be increasingly fewer buyers in the future from those generations.

There are a lot of Gen Xers, and a whole lot of Millennials. Can we expect them to take up the slack? Certainly, to an extent. But will that be enough?

On a macro level, it would seem that the new buying pool would be smaller because cars are not as important to them as they have been to us. They don’t race, they don’t work on them — a lot of them don’t even drive. Governments are forcing an electric-car future, and gasoline-powered sports cars will be increasingly awkward to drive.

It’s not really a better picture on the micro level. As the younger generations gain the financial strength to finance car collections, they are most likely going to be buying the cars they lusted after in their youth, not our youth. Do you really think your 1957 Chevy Bel Air is going to make a big value comeback? You might ask your father about how he came out holding onto his Ford Model T.

Sure, there are cars that are always going to be desirable and command a following. But this group is going to shrink, and many models are going to go the way of the Baby T-Bird.

Put it all together, and it starts to look like a downward trend in values may materialize.

Income taxes

I work with many collectors who want to find tax-efficient ways to move their collections to their children, but they always get a painful look on their faces when I ask them if their kids want the cars. Sure, your kid might want this one, or that one, but the whole collection? If you want to find out, ask your son or daughter what they would rather have for their next birthday — your E-type or $200,000 cash?

If the answer convinces you to sell the car, let’s look at the income tax consequences.

If you sell your collector car today, your gain will be taxed as a long-term capital gain at a maximum federal rate of 20%. (If your CPA tells you it’s 28% because your cars are “collectibles,” don’t believe it – the term is specifically defined in the tax law and does not include cars.) The gain is also subject to the federal 3.8% net investment income tax. If you live in a no-income-tax state such as Florida, the 23.8% is the full bill. But if you live in a high-tax state such as California, you can add another 12.3% to that, and another 1% if your income exceeds $1 million. Under current federal rules, you can only deduct $10,000 per year in state and local taxes, which you probably exhaust with your property taxes. So your top rate can be 37.1%.

Although that’s a lot of tax to pay, the rates may go up. There has been a lot of pressure to kick the capital-gains rate up to 25% or 28%, and odds are it will happen at some point. So today’s tax rates are “the good old days.” If you are going to sell your cars, you should do it before the rates go up.

Estate taxes

Today’s estate and gift tax rates are also at the low-water mark. We each have a lifetime exemption equivalent of just over $12 million, double for a married couple, and a 40% tax rate when you get over that amount. However, under current law, that changes in 2026 (and there is great pressure to pull the new rules forward). The exemption will fall to about $6 million ($12 million per couple), with the tax rate going to 45%. And, if you live in one of the 18 states (counting the District of Columbia) that has an estate or inheritance tax, add up to another 12% (20% tax, less the 40% value of the deduction against the federal tax).

But the big thing about estate tax is that when your family inherits your cars at your death, they get the benefit of the “basis step-up” that eliminates the income tax. Let’s take that $200k E-type you are thinking about giving to your kid. Say you paid $30,000 for it 15 years ago and made $20,000 in improvements. Your $50,000 investment is your “basis” for tax purposes. If you sold it today, you would pay tax on the $150,000 gain, which is the sales price less your basis.

But when your family inherits the E-type at your death, it is subjected to estate taxation based upon its $200,000 value. Whether or not that actually produces an estate tax, their basis magically “steps up” to the $200,000 value. Thus, they can sell it for $200,000 and have no income tax to pay.

The basis step-up at death is what keeps people from selling highly appreciated assets. However, there is a lot of pressure to change that rule, and it may go away, which would be a game-changer.

Give ’em to the kids

Although it may come to mind, you can’t sidestep all the tax issues by just giving the E-type to your offspring.

First off, you’re making a $200,000 gift. Assuming you’ve already used up your $15,000 annual exclusion, that eats up $200,000 of your exemption, which will eventually cost your family more estate tax. That could be anywhere from $80,000 to $104,000, depending upon your state of residence.

Second, your kid takes the E-type with your $50,000 basis. Whenever he sells it, he recognizes the $150,000 gain, which can produce as much as 37.1% tax at today’s rates, higher if he sells it after income tax rates have gone up.

Sell and improvise

Another approach to consider is to just sell to a junk car company and pay the tax. There are services that offer cash for junk cars. As for other options and what comes next, work with your estate planning attorney to find other tax-efficient ways to shift the after-tax sales proceeds to your family. There are many estate planning techniques that can be employed to transfer wealth at minimum tax cost, and cash gives you a lot of flexibility to pick the most appropriate ones.

Everybody’s situation is unique, but for many collectors, all of these forces are converging in a way that makes selling your cars attractive. Under current rules and rates, the holy grail is to hold them until death to get the basis step-up. Even at a possible 52% rate, paying estate tax but no income tax is the cheapest result. But we cannot be confident that the current tax structure will remain in place for long.

Meanwhile, holding your cars exposes you to market risk. As discussed, there are certainly some downward pressures on the market. One can easily see how the benefits of holding on for tax purposes can be overcome by a substantial loss of market value. ♦