Motorcycle Sale

[Jergan5]

I recently inherited a 1940’s Indian motorcycle from my grandma who passed away. I am selling it. Would the money made off of it have to be reported on my taxes for this year?

[Critter-3]

Yes you report the sale and your basis is the fair market value as of the date of death so if you sell it shortly after her death then the fair market value and the sale price should be the same figure.

[Jergan5]

Even if it falls under the reportable amount for inheritance tax?

[Critter-3]

Inheritance tax and income tax are two totally different things.

[Jergan5]

I understand that. However, since the sale is essentially part of my inheritance, would it move over to inheritance law or do I lose that capability?

[rjs]

The motorcycle is part of your inheritance. The sale is not part of your inheritance. You inherited the motorcycle, not the money you sold it for. Anything you do with the motorcycle once you own it, such as selling it, has nothing to do with inheritance tax. You sold a motorcycle that you owned. If you sold it for more than your basis, you have to report the sale on your income tax return.

[Jergan5]

So, would my basis be $0 or the fair market value of it when I inherited it? 

[rjs]

Your basis is the fair market value on the date of your grandmother's death.

[Opus 17]

An estate tax taxes the value of the estate before the estate is distributed to the heirs. An inheritance tax may be charged to the heirs based on the value of their inheritance.  The federal government does not have an inheritance tax and the estate tax does not kick in unless the value of the estate is more than $11 million. Some states may have an inheritance tax and you would have to check with state law on that.

However, even an inheritance tax only applies to the actual transfer of the property. Once you own the property, what you do with it is entirely separate and subject to its own taxation rules.  In the case of tangible personal property, you have a capital gain and you owe capital gains tax if you sell the item for more than its cost basis.  For an inherited item, the cost basis is the fair market value on the date of the previous owners death, plus any adjustments that you can make for the cost of permanent improvements. This usually applies to real property, but it could apply to a motorcycle—if you pay to have it restored after you inherited it, for example, those restoration costs would add to the cost basis.

If you sell for the cost basis, you don’t have a capital gain. If you sell for more than the cost basis, only the amount over the cost basis is the taxable capital gain. Inherited items are always taxed as long-term capital gains, no matter how long you actually owned the item, and the long-term capital gains rate is 0%, 15%, or 20%, depending on your other income.

You must make diligent efforts to document the fair market value on the date of the previous owners death, because if you are audited, the IRS does not have to allow any cost basis that you can’t prove.

[tagteam]

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@Opus 17 wrote:

...Some states may have an inheritance tax and you would have to check with state law on that.

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Yes, only six states impose an inheritance tax and all but two, Pennsylvania and Nebraska, entirely exempt lineal descendants (which, of course, would include a grandchild).

[Opus 17]

I should also point out that the capital gains on the sale of collectibles is taxed differently than other capital gains.  Gains on the sale of collectibles is taxed as ordinary income with a cap of 28%, and does not benefit from the 0%, 15% and 20% rates for other capital gains.

https://www.gtreilly.com/blog/article/selling-that-original-warhol-prepare-for-tax-bite-on-your-coll...

"Collectibles" includes a list of specified items, plus "anything else designated by the IRS as a collectible."  If audited, the IRS might decide the motorcycle was a collectible instead of an investment.  One factor is how you treat the property.  If your intention is to sell it immediately, then it might be treated as an investment by you, even though it was a a collectible to your grandmother.  As an investment to you, it would be taxed at the lower long term capital gain rate.

However, this is something you will want to be aware of, and include in your documentation.  Keep paperwork related to the inheritance, appraisal and sale of the motorcycle with your other important papers for at least 6 years, in case of audit.  

[tagteam]

Collectibles can be held for investment purposes or personal purposes (depending upon the intent of the owner).

Regardless of how a collectible is held, it is taxed at ordinary income tax rates up to a maximum of 28%. If the collectible is held for personal purposes, a net loss cannot be deducted (net gains are reported and taxed at the aforementioned rate irrespective of the purpose for which the collectible was held).

[Opus 17]

@tagteam 

The point is that some items not specifically designated as collectibles might still be considered collectible by the IRS (such as a classic motorcycle).   In that case, the intent of the owner might come into play to determine how to tax the sale.  (For specifically listed types of collectibles, intent doesn’t matter.)

[tagteam]

@Opus 17 

You wrote: "If audited, the IRS might decide the motorcycle was a collectible instead of an investment"

My point was that the motorcycle can be both an investment and a collectible (i.e., merely because it could be considered a collectible does not exclude it from being held as an investment).

[Opus 17]

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@tagteam wrote:

@Opus 17 

You wrote: "If audited, the IRS might decide the motorcycle was a collectible instead of an investment"

My point was that the motorcycle can be both an investment and a collectible (i.e., merely because it could be considered a collectible does not exclude it from being held as an investment).

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Ok, how about,

"If audited, the IRS might decide to treat the motorcycle as a collectible, which you might be able to rebut by showing it was only an investment to you and you sold it instead of holding it in a collection."