While many people do not understand the lure of certain collectibles, there are a ton of different kinds of high price tag items that can be sold to enthusiasts around the world. From coins and watches to antiques and cars, collectibles can be sold individually or as part of a larger collection of unique products.
If you sell a collector’s item for a significant amount of money, then taxes will be applied to the sale. For function or decorative, one of a kind pieces of history, taxpayers can choose to utilize a 1031 exchange on the sale of a collectible. In doing so, capital gains taxes can be deferred so long as another property is purchased in the collectible’s place.
Whenever it comes time to let go of your collectibles, we highly recommend looking into purchasing mineral rights through a 1031 exchange. With mineral rights, nothing is taking up space in your house and a mineral royalty check may be in the mail next month.
In this article, we will outline the steps to take in order to properly sell collectibles with a 1031 exchange. After this, we will make the case for mineral rights and royalties as one of the best possible reinvestments of your capital.
How to Sell Your Collectibles
To initiate a 1031 exchange, first, you must sell your collectible property. Obviously, there are a ton of different personal property items that can be considered a “collectible.” Under IRS law, the following can be considered a collectible in the event of a 1031 exchange:
- And much more
If there is a dedicated community around your collectible, the best way to sell your item is to connect with members of that community that may be interested in purchasing it. With this in mind, it has never been easier to interact with a global community on the internet. Depending on your collectible type, if it is valuable, there is probably a message board somewhere that would be interested in learning more.
Determining the Value of Your Collectibles
As we alluded to earlier, collectibles come in all shapes and sizes. Whereas some collectibles lose their value (sorry, Beanie Babies), others may appreciate in value over time. In some cases, collectibles will have dedicated websites or in-person events in which enthusiasts can freely buy or sell their collectible items.
There are many factors that influence the value of a collectible, including:
- The approximate market value
- Age and number of previous owners
- Type of sale (i.e. to an individual or resale shop)
- Ability to bundle with other collectibles in the same deal
- Shipping or logistics
- And more
If they are not functional, collectible markets can be very unpredictable. While many private owners simply collect for the love of the game, there usually comes a time to depart with assets that either take up space or are ripe for selling.
Taxes Paid on the Selling Collectibles
If you sell your collectible property for a significant amount of money, then you can also expect to pay a significant amount of money in taxes. Although the exact figure is largely dependent on your location and size of your sale, the following are usually applied on high-ticket collectible sales:
- Federal Income Taxes
- Capital Gains Taxes
- Sales Taxes
- Local Taxes
- And More
Experienced investors are well aware of capital gains taxes, whereas those selling their first collectible at a highly appreciated rate may not. Capital gains taxes are only applied if a significant amount of money is made on the sale, but they can also be avoided with a 1031 exchange.
Selling Collectibles with a 1031 Exchange
With a 1031 exchange, the IRS allows individuals to essentially “trade” collectibles for another property in order to avoid paying capital gains taxes. If the new property is of greater value than the collectible, then it is likely that a taxpayer will become eligible to defer 100% of the capital gains taxes that would otherwise have been applied.
Collectibles Like-Kind Properties
According to the tax code, collectibles must be replaced with a “like-kind” property in order for a valid 1031 exchange to be accomplished. Although most collectors may not consider their items to be similar to homes or stores, the reality is that a 1031 exchange can be used to purchase practically any kind of personal property while deferring capital gains taxes.
The IRS considers the following “like-kind” properties:
- Mineral Rights and Royalties
- Apartments and apartment buildings
- Stores and strips malls
- And s much more.
Collectibles 1031 Exchange Timeline
The day you sell your collectible, your eligibility for a 1031 exchange begins. In the first 45 days, you must identify at least one property that can be considered as a reasonable replacement for your capital. In total, taxpayers have just 180 days, or about 6 months, to purchase a new property in a 1031 exchange.
1031 Exchange Intermediaries for Selling Collectibles
With deadlines to meet and paperwork to file, many first-time and experienced investors choose to use a 1031 exchange intermediary when selling collectibles. In doing so, specialized industry professionals can help make sure everything goes as planned while helping to identify market-specific properties for the exchange to be used to purchase.
Why Purchase Mineral Rights and Royalties?
Mineral rights and royalties are a strong part of many American portfolios, even though they are not readily available throughout the world. Here in the United States, it is impossible to lease your mineral rights to oil and gas companies in order to extract and profit from the natural resources in your property’s subsurface.
With monthly mineral royalty payments, investors can receive a passive income stream generated from a successful oil and gas lease. In today’s world, resource scarcity is as critical as ever, making mineral rights a sound investment for leasing or reselling in the future.