Friend has a ( Capital gains ? ) windfall. Could use some input if you have any..

[mh]

Ok this will be a bit verbose and rambling but bear with me hopefully it will reduce some intermediate questions you might have..

I have a friend who has what i'll a single "collectible" that they have been offered a little north of .5M for this item. The offer is real, the buyer somehow tracked them down and made the offer so it's not a "antiques roadshow" bogus value.

They may have one or two other valuable "collectibles" in addition to this, but they are probably not in this same range. I can only wildly guess, but let's say there may be 50 to 100k more in assets like this present. Those would likely take longer to sell.

He's had this bigger item for many years and the basis on it is microscopic enough such that, for the purposes of discussion, we're talking about a full .5M in gains from the sale. The sale will take place sometime this year probably.

Their income stream at the moment is pretty modest. SS and a small pension. I don't know the exact numbers at the moment, but they're single, late 80's in age and well within the 15% tax bracket.

They just got a reverse mortgage but i don't think it's actually begun payouts yet (just to throw weirdness into the mix for you all). There's no reason for this person to leave any money behind as inheritance.

This individual is still sharp as a tack but physically they are somewhat frail. This person could still travel, etc.. (which they would like to do) with some assistance (via a wheel chair for e.g.). so they would like to "utilize" this
money in the near term within reason. in a few years it's conceivable that
options for them spending their money like that will be gone.

So. At least naively, it seems that if they took the simple route and just made the sale. they would have to pay capitals gains of 15% and being a california resident, i would guess there will be a hit there also.

So.. if anyone has had a similar situation in their lives i would like to hear about anything you might have to say on the subject. They're going to talk to an accountant (and perhaps a lawyer) but this person doesn't have much of anyone looking out for their back except me at the moment.

An immediate question would be the tax issue. Would some kind of structured payment or other device make sense to spread out the tax burden over a few years ?

I'd love to hear your comments / suggestions / questions.

 

[FIREd]

Long term capital gains on collectibles are taxed at 28% IIRC.

Also, it is my understanding that California taxes long term capital gains at ordinary income tax rates (correct me if I am wrong), so tax rates up to 9.3% could apply there.

 

[Midpack]

Long term capital gains on collectibles are taxed at 28% IIRC.

Looks to be the case...

There are three exceptions where capital gains may be taxed at rates greater than 15%:

The taxable part of a gain from selling Section 1202 qualified small business stock is taxed at a maximum 28% rate.
Net capital gain from selling collectibles (such as coins or art) is taxed at a maximum 28% rate.
The part of any net capital gain from selling Section 1250 real property that is required to be recaptured in excess of straight-line depreciation is taxed at a maximum 25% rate.

Tax Topics - Topic 409 Capital Gains and Losses

 

[mh]

Long term capital gains on collectibles are taxed at 28% IIRC.

Yeah I see that now after further investigation. I'm not sure why the previous place i was looking said otherwise. Thanks for pointing that out.

 

[RunningBum]

I don't know much about it but this might be the kind of thing that you would set up a revocable trust in. I don't know how to put the collectible in the trust since there is no title or ownership document for it, but if you could, the gain is not taxed inside the trust. There are just other rules about disbursing a certain % from the trust each year. So this may or may not work for a collectible, I may not have the details right, it may be too late to set up, and there are expenses in setting up the trust. But perhaps it's an idea to look into. Hopefully I'm not sending you down a path of a lot of effort that won't work.

 

[pb4uski]

If I was in my late 80s and didn't have any heirs I think I would sell it, stiff the gummit on the taxes, spend the money and take my chances that by the time they figured it out and caught up with me I would be pushing up daisies.

Or pay the ~ 35% and enjoy the remainder guilt-free.

 

[MooreBonds]

Interesting situation!

One alternative idea: I know that the IRS is starting to crack down on people that sell things on eBay and similar sites, and considering them to be a form of a business (or, at least, to somehow declare their revenue and some resulting net income to be taxed).

What would it take for said individual to create (in the eyes of the IRS) a side hobby 'business"? You mentioned that they have a few other items that are worth tens of thousands (perhaps more) that they might sell later this year as well. If they did have several items, could that be enough to declare it a 'hobby business'?

Could it be similar to an antique/classic car hobby business? Just because your volume is in the single digits doesn't mean it's not legit (as a dealer of expensive collectibles, you can only match up so many buyers/sellers of certain high-end collectibles).

If they could establish some form of a business for their hobby, couldn't their $500k in 'gains' be then written off with appropriate self-employed business expenses (home office deduction, health insurance premiums, internet connection, cell phone, trips to visit buyers and sellers, vehicle mileage, etc.), and then be taxed as income as opposed to a 28% collectible gain?

Might not be a huge benefit, since they already have some income using up the 15% tax bracket, so their benefit would be to have part of their $500k taxed at 15%, then 25%, but then even higher than the 28% collectible rate (plus self-employment taxes)...but then you'd be able to write off legitimate business expenses.

Now that I think of it, it's probably most cost-effective to just declare it a collectible gain, pay the 28% Federal/x% state, and move on. But the self-employed hobby business idea is an idea.

 

[mh]

I don't know much about it but this might be the kind of thing that you would set up a revocable trust in. I don't know how to put the collectible in the trust since there is no title or ownership document for it, but if you could, the gain is not taxed inside the trust. There are just other rules about disbursing a certain % from the trust each year. So this may or may not work for a collectible, I may not have the details right, it may be too late to set up, and there are expenses in setting up the trust. But perhaps it's an idea to look into. Hopefully I'm not sending you down a path of a lot of effort that won't work.

Your mention of trusts prompted me to do a little research with that slant. Thanks.

I have to do some more investigation, but there appears to be a something called a Deferred Sales Trust which looks like it was meant for situations like that of my friend. It seems to be commonly used when selling real estate, for example when selling a farm and not buying another real estate property. It seems that it can be used for other assets including "collectibles". It allows you to put the proceeds of the sale into the trust with taxes defered and then be taxed as you take the disbursements out from it. There doesn't seem to be a limit on how long you can defer the disbursements. Even if there is, if it let's my friend spread payments over even just a few years it's probably worth it.

As far as the ownership documentation issue goes, I can't go into specifics but there's an authoritative institution that can verify my friend as being the sole owner of the item (other than it's creator) from day one.

It appears that the institution mentioned before is well aware of this already (they contacted my friend in the past) so i think things might be ok from that respect. They could likely provide the necessary proof of ownership

 

[RunningBum]

I had the name wrong for what I was thinking. It's a Charitable Remainder Trust. However, it looks like you're on to something else that may apply here.