A 1031 exchange effectively defers the 28 percent long term federal capital gains tax when selling artwork, vintage cars and collectibles. Collectibles include sculptures, lithographs, prints, oil and water color paintings, heirloom musical instruments, numismatic coins, precious metals, gems, rare wines, antiques, vintage cars and many other collectible investment assets. What differentiates a collectible from a hobby are facts that support holding the asset in the productive use of a trade, business or for investment. Records maintained reflect purchase and sale dates, regular appraisals and insurance to cover in case of fire or damage represents a good fact pattern supporting the proper intent of holding for investment or business.
When collectibles held for use in a trade, business or investment are sold and replaced with like-kind property, federal and state capital gains taxes are deferred through Section 1.1031 of the Internal Revenue Code (IRC) in what is known as a 1031 exchange. Taxpayers will often adjust their portfolio by exchanging one collectible for another. By initiating a 1031 exchange, the tax obligation is postponed until the sale of the replacement property.
1031 eligibility is impacted by whether the Taxpayer is considered an investor or collector. Section 1.1031 of the Internal Revenue Code defines an exchange as "No gain will be recognized on property held for productive use in business or investment when exchanged for like kind property held for productive use in business or investment." The real and personal property held by the Taxpayer must be for use in a business or for investment versus predominantly for personal pleasure, use or enjoyment.
How does a private or corporate investor support a 1031 exchange intent to hold their artwork and or collectible for investment rather than for personal use or enjoyment?
Artwork and collectibles are eligible for 1031 treatment only if they are held for investment and not personal use. Clearly, aesthetic enjoyment is one of the many pleasures derived from owning fine pieces of art and collectibles. So how can these tangible personal properties be held to qualify for 1031 consideration?