USA Classic Car Capital Gains taxation

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Hello from California,

I bought a 1968 Mustang 3 years ago for personal use (under my name and registered in CA), in the intend of driving it and keeping it for a very long time. Current situation changed and I ended selling the car last year. Now, I did make a profit as the car's value increase (upgraded the vehicle too during ownership). I was able to gather all my receipts and expense during ownership, however my accountant just mentioned that I needed to take 3 years of depreciation in calculating the capital gains. For example: 01/2020 purchase price of $50000, 01/2023 Selling price of $80000. My understanding was that I would be taxes on the following: $50000 + $$ expenses/upgrades - $80000. But according to my accountant it should be the following: $50000 - 3 years of depreciation + $$ expenses/upgrades - $80000 which is quite significant.

I am just looking for a second opinion or someone who has had expericend it before? Thank you in advance.
 

DrStrangeLove

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Your accountant's approach would be correct. You're taxed on the gain you make over the amount you have invested in the car. You invested $50,000 when you bought it, making your initial basis $50,000. You recovered 3 years of depreciation in the time you owned it, and invested the $$expenses/upgrades over that same time. So your adjusted basis in the car would be $50,000 + expenses/upgrades - depreciation taken. You sold it for $80,000, making your gain $80,000 minus your adjusted basis.

Think of depreciation on the car as a recovery of the cost in the car over time against other income, and you'll see how your accountant's approach is correct.
 
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Thanks for the fast response. I was not expecting the depreciation to be part of the adjusted basis since these cars (60s - 70s classic/collector car era) have just been increasing in value over time. Based on your experience, is there a way around it? Would it make a difference if the car was categorized as "classic" or "collector"? Thank you!
 

DrStrangeLove

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Nope, there's no way around it. Depreciation bites everyone who buys depreciable assets, because it follows the purchase, not the asset. Each new purchaser of a given depreciable asset has their own depreciation schedule that gets charged against their initial basis.

A "classic" or "collector" car might exempt you from certain road taxes in some states--I can't speak to California, but my state charges less road tax for classics/collectors, since they usually have relatively low mileage per year. But under the Tax Cut and Jobs Act, classic cars and collectible cars use the same depreciation schedule as a current year Mazda.

On the other hand, you can offset the capital gains from selling the car with realized capital losses from other investments like stocks that you sold at a loss. That could reduce the total amount of taxable gains you have.

And capital assets meeting the definition of "collectibles" pay a maximum tax rate of 28% on their gains. Talk to your accountant about whether your car meets the criteria to be considered a "collectible" for capital gains tax purposes. It may not be much, but if your marginal tax rate is more than 28%, you'll save something.
 

Samir

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Thanks for the fast response. I was not expecting the depreciation to be part of the adjusted basis since these cars (60s - 70s classic/collector car era) have just been increasing in value over time. Based on your experience, is there a way around it?
If you haven't taken the depreciation as an expense in the last few years, then that is a way out since you never got the benefits of depreciation and therefore didn't reduce your basis. However, you may need to take all 3 years of depreciation at once at the sale depending on the tax rules.
 

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