Some of your most precious possessions may be collections of items you have accumulated over your lifetime. You have probably put a great deal of thought into who should receive these collectibles as part of your estate plan. But have you considered the tax consequences of the eventual sale of these items?
Gifts of collectibles can be among the most meaningful legacies people ever receive, and many people hope and intend that they will never be sold. But there are some important tax consequences to be aware of, in any event.
What are collectibles?
Collectibles are defined by the Internal Revenue Code to include:
- Fine art (such as paintings and sculpture)
- Stamps and coin collections
- Precious metals and gems
- Rare rugs
- Alcoholic beverages (such as fine wines)
The Internal Revenue Code specifies that some bullion and precious metal coins are treated as regular investment assets, not as collectibles.
Collectible items may be sold by inheritors, or by executors under instructions to liquidate an estate. The sale or exchange of these items, either by your executor or by someone who has received them as a legacy under your will, will incur capital gains tax: investments in collectibles you have owned for more than one year are taxed at a flat rate of 28 percent. Short-term investments in collectibles are taxed at the ordinary income tax rate (as short-term capital gains).
Proper tax planning is complex. We can help you ensure that your collectibles go where you want and plan properly for the estate tax consequences.