Collectible Violins, Cellos, Musical Instruments are 1031 Eligible
Posted by Andy Gustafson on Thu, Sep 23, 2010
Collectible violins, cellos, violas, basses and musical instruments used for business, used in a trade or held for investment are eligible for 1031 tax deferral treatment deferring the capital gain given the asset is replaced with a like kind instrument. This follows the real for real property and personal for personal property requirement.
Recently, a dealer representing a client asked how a 1031 would apply to the chamber musician looking to sell and replace their expensive or collectible instrument. First we discussed whether the instrument qualifies for 1031 treatment or qualified use. Then if the sale results in a gain or profit above the original purchase price less depreciation less selling expense, then the value or gain is taxable subject to ordinary income rates.
The exchange can be either a forward where the old instrument is sold before the new one is purchased. Or in a reverse 1031 exchange, where the new instrument is purchased before the sale of the old one. A qualified intermediary such as Atlas 1031 is engaged to prepare the 1031 exchange documents in accordance with the IRS 1031 regulations and hold the exchange proceeds or net equity from the sale in a secure, interest bearing, non commingled account. The escrow account can be protected through a qualified escrow agreement requiring dual signatures or an account with a personal identification number known only to the Exchangor and the bank. When the new instrument is to be purchased, exchange documents are prepared and the funds are wired to the account of the Seller or escrow agent.
It is suggested to discuss the transaction with your accountant to determine the potential gain and whether a 1031 exchange is advisable. Are you considering selling your instrument?
