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.
All states recognize the Federal 1031 exchange tax code permitting the deferral of capital gain at the state income tax level. Those states that do not observe the Federal statute require the Taxpayer pay a state income tax on the gain in addition to the potential of paying tax on the sale out of state replacement properties.
Internal Revenue Code §1031 represents the ability to defer Federal capital gains and recaptured depreciation taxes when selling real or personal property held for investment or in the production of income or in a business and replacing with real or personal property held for investment or in the production of income or in a business.