Selling a card you inherited - Income tax

[parkplace33]

If I get a card through an inheritance in an estate(let’s say it is valued 50k) and I then sell it for 50k, do I pay income tax on the 50k?

[rhettyeakley]

I imagine it depends on what was reported when you inherited it. Was it through an estate that you paid some inheritance tax on when it was rec’d or whether you were handed the card by a relative and it was never reported as having been inherited by you. I am not a tax professional or anything but more info is likely needed before an accurate answer can be given.

[parkplace33]

Originally Posted by rhettyeakley

I imagine it depends on what was reported when you inherited it. Was it through an estate that you paid some inheritance tax on when it was rec’d or whether you were handed the card by a relative and it was never reported as having been inherited by you. I am not a tax professional or anything but more info is likely needed before an accurate answer can be given.

Through an estate. Will add to the post.

[RL]

yes, you can go to the IRS site for a lot of information

[Peter_Spaeth]

I defer to the accountants here, but I thought with an inheritance you get a step up basis to FMV .

[mrreality68]

Sounds like a question for Bob C. He has the qualifications and the knowledge for this question. And he knows how to make it easily understandable

[Rhotchkiss]

No tax. At death, the basis becomes fair market value. If you then sell it for fair market value, no tax. But make sure you can prove that at death it was worth what you sold it for

[MikeGarcia]

Originally Posted by RL

yes, you can go to the IRS site for a lot of information

.. use a public library computer if you think you need to divulge any specific details though. ;.IRS is adding several new hires , and a Q like yours coming in over the transom can be easy pickin's for a hot dog new hire. Just a thought. PARANOICS spend less time in court than your average Jose.

..

[swarmee]

AFAIK (not a lawyer or accountant)

If you inherited this year and sold this year, then the your cost basis would be equal (effectively) to your sale value, and you would not show a profit and therefore wouldn't owe tax.

If you inherited 10 years ago when a T206 Ty Cobb was $500 and sold it now for $10,000, you would owe tax on a profit of $9,500.

[trambo]

Should be no tax provided it's worth the same or less at the date of sale as it was on the date of transfer. If it's a $50k sale and it was transferred to the person at $45k, there would be tax on a $5k gain (not $5k in tax).

[Exhibitman]

THIS IS NOT LEGAL ADVICE; DO NOT RELY ON IT!!!!!

To prove valuation and the stepped-up basis, you may have to get an appraisal. If a decedent’s estate contains assets that have marked artistic or intrinsic value that totals more than $3,000, Regs. Sec. 20.2031-6(b) requires the appraisal of an expert, executed under oath, to be filed with the estate tax return. There is no requirement for a qualified appraisal (one that meets the requirements for certain charitable contributions). So you can get an experienced dealer or auctioneer to appraise the card and issue a FMV opinion. The IRS can contest it and you can slug it out in court with experts on each side (lawyers call this a "whore fight" BTW, because when you hire an expert they are inherently favorable to you or you do not let them testify). Now, if the estate closed without declaring the item on a return and you basically were handed it, there may be a problem that requires a lawyer and CPA to sort it out.

[BobC]

Quick answer is no, you wouldn't owe any capital gains tax on selling the inherited card for $50K if its FMV on the day the person who left it to you passed away was also $50K.

As others have already mentioned, when a person passes away, all of the assets they leave to their heirs are valued at their then current FMV as of the decedent's date of death (DOD). And regardless of what the decedent may have originally paid for the items now being left to their heirs (or what some other alternative tax basis they had in those assets may have been), that FMV at the DOD becomes the new "stepped-up" tax basis of the assets in the hands of the heirs, such as yourself. In other words, when you inherited a card that was worth $50K on the day the person that left it to you passed away, your tax basis in that card is now $50K as well, as if you had just purchased the card for $50K yourself. So, if you ever go and sell the card later on, you get to deduct that $50K "stepped-up" tax basis from the sale price you get for it to determine what your capital gain (or loss) on the sale of the card is for federal income tax purposes.

FYI, depending on where you live, there may also be state and local taxes involved, which I'm not even going to try to get into. And also know that it is possible to pick an alternative valuation date to come up with the FMV of an inherited asset, and thus its "stepped-up" tax basis for tax purposes. Not going to get into any particulars regarding what or how to do it, but just know that you can choose a valuation date of up to 6 months after the decedent's date of death. Most people just go with the (DOD) for FMV purposes though.

Also know that the sale of inherited assets by an heir is automatically afforded Long Term Capital Gain/(Loss) treatment, regardless of how long they end up owning the inherited asset before selling it. In other words, you don't have to wait a full year before selling the inherited card to get the LTCG max rate of no more than a 20% federal tax on the profit from the sale of the card.

Now, even though you may not end up with a taxable capital gain from selling the inherited card, you still should be reporting its sale, along with showing the "stepped-up" tax basis you're claiming for it, on your federal income tax return for the year in which you end up selling the card. The real question then becomes how do you prove to the IRS, should they ever come asking questions of you, what your "stepped-up" tax basis in the card is. First thing I would suggest in your case is to check and see if there was someone appointed as the executor or fiduciary of the decedent's estate, and find and ask them if there was any kind of formal or informal appraisal or valuation done to come up with a FMV for the card you inherited. And if so, see if you can get a copy of it for your own tax records, and to support the "stepped-up" tax basis you reported for the card on your income tax return. And if the decedent's estate was large enough that a federal estate tax return actually had to be filed for it, you definitely need to find the executor/fiduciary responsible for filing it, and ask them exactly what the FMV of that card is shown as on the decedent's estate tax return. You want to make 100% certain that you then use the exact same FMV for that card, as shown on the decedent' estate tax return, as the "stepped-up tax basis when you sell and report it on your personal federal income tax return.

And if by chance there was no estate tax return that needed to be filed, and no formal valuation or appraisal was done of the card by the estate executor or fiduciary, you may want to do your own formal/informal valuation or appraisal to be able to document and support how you came up with the FMV of that card you are going to use as its "stepped-up" tax basis for your own income tax purposes. You could try reaching out to someone you may know at an AH/dealer who has experience in the hobby, to see if they'd be willing to give you a written appraisal/valuation of the card in question. Absent that, maybe go online or search AH sites to see if you can find comparable sales of the same card to support the FMV you're using to determine its "stepped-up" basis. And as a sort of last resort if you can't really find any recent comps, or have anyone provide an appraisal/valuation for you, as long as you end up selling the card fairly quickly after inheriting it, you could always just argue to the IRS that not enough time has passed for the card's FMV to have changed from what it was on the date the person you inherited it from passed away. In which case you'd argue that what you ended up selling the card for set its FMV for tax basis purposes as well.

The tax code/section reference that Adam posted and referred to in the previous post actually has to do with the decedent's estate and the potential filing of a federal estate tax return, NOT with you as an heir to the estate and the selling of an inherited asset from it, and the reporting of that sale on your personal income tax return. If you want to be more technically correct, here is the accurate description and references to look at for additional info regarding the reporting of "stepped-up" tax basis from sales of inherited assets. This following is from the actual IRS website:


Basis and Recordkeeping
Basis is the amount of your investment in property for tax purposes. The basis of property you buy is usually its cost. There are special rules for certain kinds of property, such as inherited property. You need to know your basis to figure any gain or loss on the sale or other disposition of the property. You must keep accurate records that show the basis and, if applicable, adjusted basis of your property. Your records should show the purchase price, including commissions; increases to basis, such as the cost of improvements; and decreases to basis, such as depreciation, nondividend distributions on stock, and stock splits.

If you received a Schedule A to Form 8971 from an executor of an estate or other person required to file an estate tax return, you may be required to report a basis consistent with the estate tax value of the property.

For more information on consistent basis reporting and basis generally, see Column (e)—Cost or Other Basis in the Instructions for Form 8949, and the following publications.

Pub. 551, Basis of Assets.
Pub. 550, Investment Income and
Expenses.


This is a link to a copy of the ITS Form 8949:


https://www.irs.gov/pub/irs-pdf/f8949.pdf



The following is an excerpt from the IRS instructions in regard to Column (e) of Form 8949, as referenced and referred to above:

Column (e)—Cost or Other Basis
The basis of property you buy is usually its cost, including the purchase price and any costs of purchase, such as commissions. You may not be able to use the actual cost as the basis if you inherited the property, got it as a gift, or received it in a tax-free exchange or involuntary conversion or in connection with a “wash sale.” If you don't use the actual cost, attach an explanation of your basis.

The basis of property acquired by gift is generally the basis of the property in the hands of the donor. The basis of inherited property is generally the fair market value at the date of death. See Pub. 551 for details.

If you sold property that you inherited from someone who died in 2010 and the executor made the election to file Form 8939, see Pub. 4895.

If you elected to recognize gain on property held on January 1, 2001, your basis in the property is its closing market price or fair market value, whichever applies, on the date of the deemed sale and reacquisition, whether the deemed sale resulted in a gain or an unallowed loss.

Schedule A to Form 8971—Consistent basis reporting. If you received a Schedule A to Form 8971 from an executor of an estate or other person required to file an estate tax return and you are a beneficiary who receives (or is to receive) property from that estate, you will be required to report a basis consistent with the final estate tax value of the property if Part 2, column C, of the Schedule A you received indicates that the property increased the estate tax liability of the decedent. In this case, first use an amount that is equal to or less than the final estate tax value listed in Part 2, column E, of the Schedule A. This amount is your initial basis in the property. You then adjust your initial basis in the property, as described under Adjustments to basis, later. The resulting amount is entered in column (e) of Form 8949.
.
This is an Image: taxtip.gifIf you received a supplemental Schedule A to Form 8971, use the most recently dated supplemental Schedule A to determine your initial basis.
.

Penalties for inconsistent basis reporting. If you use an initial basis that is more than the amount listed in Part 2, column E, of the Schedule A to figure your basis in the property and Part 2, column C, of the Schedule A indicates that the property increased the estate tax liability of the decedent, you may be subject to a penalty equal to 20% of any resulting underpayment of tax because the basis reported isn’t consistent with the final estate tax value of the property.
For more details, see Pub. 551, Pub. 550, or the Instructions for Form 8971 and Schedule A, available at IRS.gov/Form8971.

Hope this helps.

[Peter_Spaeth]

Bob what if -- horrifying I know -- the decedent's estate tax return understates the value of the card, in an effort to avoid or minimize taxes? Is the heir really stuck with that?

[MikeGarcia]

Originally Posted by Peter_Spaeth

Bob what if -- horrifying I know -- the decedent's estate tax return understates the value of the card, in an effort to avoid or minimize taxes? Is the heir really stuck with that?

.; Aw , great . Now you've got all of on here afraid of dying.

..

[Casey2296]

Originally Posted by Peter_Spaeth

Bob what if -- horrifying I know -- the decedent's estate tax return understates the value of the card, in an effort to avoid or minimize taxes? Is the heir really stuck with that?

Wouldn’t one get an appraised value at time of death on the assets in order to establish a new cost basis?

[BobC]

Originally Posted by Peter_Spaeth

Bob what if -- horrifying I know -- the decedent's estate tax return understates the value of the card, in an effort to avoid or minimize taxes? Is the heir really stuck with that?

Sorry, I was updating the post to add more info, and to cover what Adam said so that people would understand that what he posted actually referred to the decedent's estate, and not the personal tax return of an heir who was selling inherited property.

The two may be linked in some aspects, such as being sure to showing the same appraised value of the card for FMV and "stepped-up" basis purposes.

As for your specific question, that could be a real problem. If you look at the last section from my previous post, referring to instructions from IRS Form 8949 (the form on which the sale of the card would be reported) it very specifically spells out the potential for a 20% penalty of any underpaid tax the heir may have because he didn't use and report the same tax basis for the card on his return as it was reported on the decedent' estate tax return. The IRS will also tack on interest for any underpaid tax as well.

Unfortunately, the FMV and basis of the card is determined by the decedent's estate and the executor/fiduciary in charge of it, and is considered the de facto accurate figure(s) to then be used by the heirs. If an heir disagrees with the estate's valuation after the fact, the smartest thing to do would probably be to try and go back to and convince the executor/fiduciary to file an amended federal estate tax return (Form 709), and change the FMV of the card to what the heir believes is correct and accurate, assuming it can be supported and proven by an actual appraisal or valuation. That way the heir can file their personal federal income tax return using a "stepped-up" tax basis for the card that now agrees with the decedent's estate tax return.

However, by filing an amended federal estate tax return, depending on the size of the decedent's estate it is possible that could now result in the decedent's estate owing more federal estate tax (plus interest and penalty) instead. And now you have to remember and consider that the maximum federal estate tax rate under current law is at 40%, while for the heir, the maximum federal LTCG tax rate is only 20%. So in looking at keeping as much money in the family and away from the IRS as possible in this case, it may actually be better for the heir to swallow the mistake, and just use what was shown as the FMV on the originally filed decedent's estate tax return as the "stepped-up" tax basis for the card's sale as reported on the heir's personal federal tax return. The heir may only be getting hit with a 20% tax, whereas on the estate return it may cost the family up to 40% on the same card valuation difference.

In any event, it will end up being a PITA for everyone, and probably require the tax accountant(s) to go back through the heir's personal federal tax return and the decedent's federal estate tax return to figure out the actual tax, penalty and interest costs for the different ways to try and fix this, and see which one costs everyone involved the least amount of money. And that includes the potential added cost for the time and effort to file an amended estate tax return for the decedent's estate.

The one thing you absolutely do not want to do though is to have the heir ignore what may have been reported by the decedent's estate to the IRS in regard to the card's FMV for "stepped-up" tax basis purposes. Showing a different value that does not tie back to what was reported on the decedent's estate tax return will likely get both the executor/fiduciary of the estate, and the heir selling the card, a couple of love letters from the IRS with a few questions for both of them as to what the heck is going on. And the tax accountant(s) likely get(s) to charge both sides even more now to handle the IRS' audit inquiries. Sooooo much fun being a CPA/tax accountant!

[Exhibitman]

I agree, Bob. I cited the regulation only to make clear that the appraisal doesn't have to jump through the same hoops as an appraisal for a charitable donation of an asset like a card. I also agree that the OP's first stop is the executor of the estate or the trustee of the trust (if the item was in a trust) to ask about whether an appraisal was done and whether an estate tax return was filed. The overwhelming majority of estates will not hit the threshold that requires a return (it is over $12 million right now), so odds are that there was nothing filed and no appraisal done. Which brings us to valuation. If the card is a slabbed mainstream card, odds are there are plenty of comparable sales around the time of death that the collector can rely on to make a case for FMV. If the item is esoteric, however, there may be a need for an appraisal from someone who has enough experience in the field to be able to qualify as an expert in court. As I recall, Heritage at one time actually offered that kind of service for a fee, so perhaps that is a place to start.

I guess I am fortunate that all the stuff I inherited from my parents was crap.

[Peter_Spaeth]

Originally Posted by BobC

Sorry, I was updating the post to add more info, and to cover what Adam said so that people would understand that what he posted actually referred to the decedent's estate, and not the personal tax return of an heir who was selling inherited property.

The two may be linked in some aspects, such as being sure to showing the same appraised value of the card for FMV and "stepped-up" basis purposes.

As for your specific question, that could be a real problem. If you look at the last section from my previous post, referring to instructions from IRS Form 8949 (the form on which the sale of the card would be reported) it very specifically spells out the potential for a 20% penalty of any underpaid tax the heir may have because he didn't use and report the same tax basis for the card on his return as it was reported on the decedent' estate tax return. The IRS will also tack on interest for any underpaid tax as well.

Unfortunately, the FMV and basis of the card is determined by the decedent's estate and the executor/fiduciary in charge of it, and is considered the de facto accurate figure(s) to then be used by the heirs. If an heir disagrees with the estate's valuation after the fact, the smartest thing to do would probably be to try and go back to and convince the executor/fiduciary to file an amended federal estate tax return (Form 709), and change the FMV of the card to what the heir believes is correct and accurate, assuming it can be supported and proven by an actual appraisal or valuation. That way the heir can file their personal federal income tax return using a "stepped-up" tax basis for the card that now agrees with the decedent's estate tax return.

However, by filing an amended federal estate tax return, depending on the size of the decedent's estate it is possible that could now result in the decedent's estate owing more federal estate tax (plus interest and penalty) instead. And now you have to remember and consider that the maximum federal estate tax rate under current law is at 40%, while for the heir, the maximum federal LTCG tax rate is only 20%. So in looking at keeping as much money in the family and away from the IRS as possible in this case, it may actually be better for the heir to swallow the mistake, and just use what was shown as the FMV on the originally filed decedent's estate tax return as the "stepped-up" tax basis for the card's sale as reported on the heir's personal federal tax return. The heir may only be getting hit with a 20% tax, whereas on the estate return it may cost the family up to 40% on the same card valuation difference.

In any event, it will end up being a PITA for everyone, and probably require the tax accountant(s) to go back through the heir's personal federal tax return and the decedent's federal estate tax return to figure out the actual tax, penalty and interest costs for the different ways to try and fix this, and see which one costs everyone involved the least amount of money. And that includes the potential added cost for the time and effort to file an amended estate tax return for the decedent's estate.

The one thing you absolutely do not want to do though is to have the heir ignore what may have been reported by the decedent's estate to the IRS in regard to the card's FMV for "stepped-up" tax basis purposes. Showing a different value that does not tie back to what was reported on the decedent's estate tax return will likely get both the executor/fiduciary of the estate, and the heir selling the card, a couple of love letters from the IRS with a few questions for both of them as to what the heck is going on. And the tax accountant(s) likely get(s) to charge both sides even more now to handle the IRS' audit inquiries. Sooooo much fun being a CPA/tax accountant!

I've had personal experience with an appraiser whose schtick clearly was to dramatically understate the value of household items amd antiques to keep down estate tax. Wink wink. It was a family situation and there wasn't much I could do about it and fortunately I had and have no interest in selling anything that came to me, but I wasn't at all happy about it.

[BobC]

Originally Posted by Casey2296

Wouldn’t one get an appraised value at time of death on the assets in order to establish a new cost basis?

You would normally think so, but what I haven't really addressed and mentioned directly yet is that in regard to filing a federal estate tax return, every single U.S. taxpayer has a lifetime estate and gift tax exemption they get to use. What this means is that when a person passes on, whoever is in charge and responsible for the handling of the deceased's estate, they are charged with figuring the current net FMV of the estate. (You do get to deduct some expenses and outstanding debts, so it is a net estate value you get to use for federal estate tax purposes.) Then once you've calculated the decedent's net taxable estate value, you compare that net taxable estate value to the lifetime estate tax exemption amount they have available, and if the available exemption amounts exceeds the net taxable value of the estate, there is no federal estate tax due, and technically no federal estate tax return has to be filed.

Currently for 2022, the lifetime federal estate and gift tax exemption each person has in $12.06M. So if a person passing away this year only has say about $1M-$2M in net FMV of assets owned, including this one particular baseball card supposedly worth $50K, the executor/fiduciary of that decedent's estate knows they are nowhere close to ever being required to file a federal estate tax return for the deceased. So why would they ever bother going through all the time, effort, expense and so on to get all the decedent's assets formally appraised and valued. They really don't need it file anything.

So in that case, the heir who inherited the card probably can't count on the estate's executor/fiduciary having done any appraisal or valuation leg work, and will have to proceed on their own to come up with what the value should be to use for the card's "stepped-up" tax basis on their personal federal tax return. And also figure out how to document that value on their own to satisfy the IRS, should they ever come knocking and asking questions. And that is also why in the original post I made about this topic, I suggested the OP check with the estate's executor/fiduciary anyway to see what, if any, formal or informal appraisal/valuation work they may have done. And to then make sure what the OP ended up using for the card's "stepped-up" tax basis agreed to what the fiduciary/executor of the decedent's estate had come up with. That way should the IRS ever come back IRS ever come back on the heir/OP, they couldn't also go back to the estate and catch the OP/heir using inconsistent FMVs.

And FYI, that lifetime estate and gift tax exemption amount, at $12.06M under current law, changes annually each year due to inflation, and goes up slightly. However, if a person chooses to give gifts in any year that exceed the annual federal gift tax exclusion amount (currently at $16,000 per person for 2022), any excess annual gift to a single person over that $16K amount gets deducted from that person giving the gift's lifetime estate and gift tax exclusion exemption amount. So that gets deducted from what they then get to pass on to their heirs free from estate taxes when they die. In simple English, and using the OP's scenario as an example. If instead of inheriting the $50K card, the person gifted it to the OP this year, and then passed away later on before the year-end. In that case, the $50K gift exceeded the 2022 annual gift tax exclusion amount of $16K by $34K. So the gift isn't taxable to the person giving it, but they have to file a federal gift tax return (Form 706) for 2022, and the $34K excess gift gets deducted from their lifetime estate and gift tax exemption amount and reduces it to $12.026M ($12.06M - $34K). So whoever ends up handling that person's estate, after they pass away later this year, now only has $12.026 of the lifetime estate exemption left they can use to offset against the estate's net taxable value to determine if they even have to file a federal estate tax return, and pay and federal estate taxes due.

The kicker is that the government can change that lifetime estate and gift tax exemption amount whenever they want, if they can get enough votes. As it is, come 2025, that lifetime exemption amount will likely drop by $5M-$6M as part of the sunset provisions of the 2017 Tax Cuts and Jobs Act, along with a lot of the other tax laws and changes passed as part of that act from 2017. That will be a dramatic change that could end up affecting a lot more people's estates in the not too distant future. And the current government administration had already talked about making changes to various aspects of the federal estate laws, such as doing away with the "stepped-up" basis rule for inherited assets, dropping the lifetime estate and gift exemption amount even further, and so on. They haven't gone forward and changed anything....yet, but that could change at anytime. So you have to stay aware of changes to these rules and laws if you have a sizeable estate. Remember this for context, when Hillary was running against Trump, one of her key tax proposal points she kept pushing was to drop that lifetime estate and gift tax exemption amount down to $1M per person. Think about that. Add up the value of your house, 401K, some other savings and assets, and then toss your collection on top of that, and how many of you now may be having to think about owing federal estate taxes after all. A millionaire today is nothing like what one was back when I was a kid

When it comes to thinking about how our collections may impact our families and our estates, it isn't something you necessarily can just do some simple research on, and then set it and forget it. You have to be aware of potential and constant changes to tax and estate laws, as well as changing values to what we have. Ask questions and have some trusted source(s) to got to for help and answers.

I think I have everything pretty much covered now. LOL

[Hondo]

Bob, thank you for taking the time to explain all this detail!
Much appreciated!

[BobC]

Originally Posted by Peter_Spaeth

I've had personal experience with an appraiser whose schtick clearly was to dramatically understate the value of household items amd antiques to keep down estate tax. Wink wink. It was a family situation and there wasn't much I could do about it and fortunately I had and have no interest in selling anything that came to me, but I wasn't at all happy about it.

The value of household items, furnishings and stuff like that is one thing. IRS agents aren't all the pricks that many people make them out to be. At least they haven't been in the past. For things like that, as long as your valuations are somewhat reasonable, I don't think you'll get much of a hassle from them. However, a single $50K baseball card may stick out like a sore thumb to them, and could possibly trigger some inquiries.

Plus, don't forget that this recently passed Inflation Reduction Act, that is expected to shortly be signed by Biden, includes an $80 billion increase to the IRS' budget over the next decade or so. I've heard as part of this huge budget increase that they intend to hire tens of thousands of new IRS employees/agents as a result. So, how much anyone want to bet this is going to result in more audits and investigations of corporate and other high-income taxpayer returns in the near future? And along with going after the more "well-to-do" taxpayers, I can definitely see part of the IRS' expanded scrutiny focusing on estate taxes as well. Oh, and this is also just in time for the start of all the new 1099-K forms that are going to begin being sent out to people in early 2023 for their $600 or more in proceeds from sales using Paypal and other such third-party payment platform services.

And I've actually acted as an estate appraiser myself for a colleague a couple decades ago. Managing partner of a firm I was at had an unmarried dentist friend/client that passed, and he made my colleague the executor of his estate. My colleague knew I was a bit of a collector, so he asked me on company billable time to go through the deceased's collections for estate tax purposes, and figure out what they were worth Back then, Ohio had an estate tax as well, so even if we lucked out and the net value of the estate value came under the federal lifetime estate tax exemption amount, the estate was still going to get hit with Ohio estate taxes. The dentist had several things he collected. Animation cels, poker chips, a small gun collection (had a nice vintage WW II German luger), and baseball cards. The best of his collection was complete '40, '41 Playball sets, all raw and in binders. Was actually kind of fun to learn a bit about some of these other collectibles.

Peter, in your case, I think that the more time that passes, the more likely you are to be okay should you ever sell anything. It is just as hard, if not harder, for the IRS to go back and definitively prove an actual FMV of some somewhat obscure antiques and items from long ago. And don't forget, since the appraiser valued the items low, when you do sell them, the result is bigger gains, resulting in more taxes due. Assuming you even report the sales that is. LOL As I previously mentioned, as long as valuations seem to be at least somewhat reasonable, the IRS is unlikely to argue too much. Plus, the IRS has a three-year statute of limitation on estate tax returns, from the date they were originally filed. So, if these appraisal issues you mentioned were from longer ago than that, I wouldn't go worrying about it at all anymore.

[BobC]

Originally Posted by Hondo

Bob, thank you for taking the time to explain all this detail!
Much appreciated!

No problem, hopefully it can be useful information to you and others.

Just remember though, it can, and often does, change dramatically over time. LOL

[Peter_Spaeth]

Originally Posted by BobC

The value of household items, furnishings and stuff like that is one thing. IRS agents aren't all the pricks that many people make them out to be. At least they haven't been in the past. For things like that, as long as your valuations are somewhat reasonable, I don't think you'll get much of a hassle from them. However, a single $50K baseball card may stick out like a sore thumb to them, and could possibly trigger some inquiries.

Plus, don't forget that this recently passed Inflation Reduction Act, that is expected to shortly be signed by Biden, includes an $80 billion increase to the IRS' budget over the next decade or so. I've heard as part of this huge budget increase that they intend to hire tens of thousands of new IRS employees/agents as a result. So, how much anyone want to bet this is going to result in more audits and investigations of corporate and other high-income taxpayer returns in the near future? And along with going after the more "well-to-do" taxpayers, I can definitely see part of the IRS' expanded scrutiny focusing on estate taxes as well. Oh, and this is also just in time for the start of all the new 1099-K forms that are going to begin being sent out to people in early 2023 for their $600 or more in proceeds from sales using Paypal and other such third-party payment platform services.

And I've actually acted as an estate appraiser myself for a colleague a couple decades ago. Managing partner of a firm I was at had an unmarried dentist friend/client that passed, and he made my colleague the executor of his estate. My colleague knew I was a bit of a collector, so he asked me on company billable time to go through the deceased's collections for estate tax purposes, and figure out what they were worth Back then, Ohio had an estate tax as well, so even if we lucked out and the net value of the estate value came under the federal lifetime estate tax exemption amount, the estate was still going to get hit with Ohio estate taxes. The dentist had several things he collected. Animation cels, poker chips, a small gun collection (had a nice vintage WW II German luger), and baseball cards. The best of his collection was complete '40, '41 Playball sets, all raw and in binders. Was actually kind of fun to learn a bit about some of these other collectibles.

Peter, in your case, I think that the more time that passes, the more likely you are to be okay should you ever sell anything. It is just as hard, if not harder, for the IRS to go back and definitively prove an actual FMV of some somewhat obscure antiques and items from long ago. And don't forget, since the appraiser valued the items low, when you do sell them, the result is bigger gains, resulting in more taxes due. Assuming you even report the sales that is. LOL As I previously mentioned, as long as valuations seem to be at least somewhat reasonable, the IRS is unlikely to argue too much. Plus, the IRS has a three-year statute of limitation on estate tax returns, from the date they were originally filed. So, if these appraisal issues you mentioned were from longer ago than that, I wouldn't go worrying about it at all anymore.

Bob, I know insurance appraisals are at the other end of the spectrum and tend to be inflated, but the disparity between the estate appraisal and previous insurance appraisals was, to say the least, remarkable. I found the whole thing offensive even if it saved some money. Yes, the SOL has passed so not worried about it from a liability standpoint.

[BobC]

Originally Posted by Peter_Spaeth

Bob, I know insurance appraisals are at the other end of the spectrum and tend to be inflated, but the disparity between the estate appraisal and previous insurance appraisals was, to say the least, remarkable. I found the whole thing offensive even if it saved some money. Yes, the SOL has passed so not worried about it from a liability standpoint.

Yeah, but don't people often suggest one value for purchase/sale, and then tack on another 10%-20%, or more, for insurance purposes? I seem to remember almost every appraiser I've ever seen on Antiques Roadshow say the item is worth X, but then tell the owner to insure it for X + Y. I believe they do that to cover possible increases and short-term spikes in future value. So I wouldn't get too worked up about that difference, and would have no problem telling an IRS agent to go watch an episode or two of Antiques Roadshow if they had a problem or didn't understand. LOL

[ALBB]

wow, thats an awful lot of reading !!

[jboosted92]

Originally Posted by parkplace33

If I get a card through an inheritance in an estate(let’s say it is valued 50k) and I then sell it for 50k, do I pay income tax on the 50k?

ill respond for the group

"what card, you didnt inherit" ?

[Johnny630]

So what’s better for your family? Dying with the cards and passing them on through an estate or selling them prior and gifting the money to them?

Seems like if they’re in your will to be passed down croaking with cards is a better tax situation for your heirs.

[Directly]

I assume this discussion is referring to only one card, what about 50 cards --- does each card need to be listed and valued separately in the will or can we show a lump sum of value?--50 cards valued at $$$$.

[swarmee]

Originally Posted by Directly

I assume this discussion is referring to only one card, what about 50 cards --- does each card need to be listed and valued separately in the will or can we show a lump sum of value?--50 cards valued at $$$$.

Are you going to sell all 50 cards in one lot or one calendar year? Or are you going to sell them over multiple years as individual cards? You are best getting new FMV's for all cards, IMO.

[Fred]

Originally Posted by Rhotchkiss

No tax. At death, the basis becomes fair market value. If you then sell it for fair market value, no tax. But make sure you can prove that at death it was worth what you sold it for

So, this is kind of like stock. The price of the stock is set to the value when the person dies and the person that inherits it has to claim gains based on that amount. Is that right?

[swarmee]

Originally Posted by Fred

So, this is kind of like stock. The price of the stock is set to the value when the person dies and the person that inherits it has to claim gains based on that amount. Is that right?

This is correct. For any additional details, there are six walls of text above that clarify.

[obcbobd]

Originally Posted by Johnny630

So what’s better for your family? Dying with the cards and passing them on through an estate or selling them prior and gifting the money to them?

Seems like if they’re in your will to be passed down croaking with cards is a better tax situation for your heirs.

I don't follow your logic. $50K or cards or $50K of cash, how are they treated differently for tax purposes? If you sell the card ten years later for $60K, you have to declare the $10K profit. Same if you invest $50K in a fund and you sell those shares later for $60K, you have a profit of $10K

I guess it would be easier to sell the cards and not declare anything. Also a lot more work.

[insidethewrapper]

I'm sure most are sending their collections in to auction houses and no tax reporting is necessary. I really believe that is why there are so many current auctions ( daily ). Easy tax free money.

[Exhibitman]

Originally Posted by insidethewrapper

I'm sure most are sending their collections in to auction houses and no tax reporting is necessary. I really believe that is why there are so many current auctions ( daily ). Easy tax free money.

Not quite accurate. The AHs are not required (yet) to act as narcs and 1099 consignors (eBay is) BUT under existing law, the consignors are required to declare the income they receive from sales. If someone is receiving big consignment checks and declares nothing, and if that person is subsequently audited and the facts emerge, not only will there be a hefty penalty, there is a real chance of a criminal referral for tax evasion, and that is one of the most successful Federal prosecution categories. A person indicted for tax fraud is basically toast. The IRS reported a 91.2% conviction rate in 2019. Tax evasion isn't worth the risk.

[Peter_Spaeth]

Originally Posted by Johnny630

So what’s better for your family? Dying with the cards and passing them on through an estate or selling them prior and gifting the money to them?

Seems like if they’re in your will to be passed down croaking with cards is a better tax situation for your heirs.

Right, because if you sell during your lifetime, you owe tax on any profit, whereas your heirs get a stepped up basis. But there may be countervailing considerations such as reducing the size of your estate through a lifetime sale.

[Hirbonzig]

Originally Posted by Exhibitman

Not quite accurate. The AHs are not required (yet) to act as narcs and 1099 consignors (eBay is) BUT under existing law, the consignors are required to declare the income they receive from sales. If someone is receiving big consignment checks and declares nothing, and if that person is subsequently audited and the facts emerge, not only will there be a hefty penalty, there is a real chance of a criminal referral for tax evasion, and that is one of the most successful Federal prosecution categories. A person indicted for tax fraud is basically toast. The IRS reported a 91.2% conviction rate in 2019. Tax evasion isn't worth the risk.

The IRS is about to hire up to 87,000 new agents, they’ll be poking their noses into a tax return near you. No time for playing games.

[Peter_Spaeth]

Originally Posted by Exhibitman

Not quite accurate. The AHs are not required (yet) to act as narcs and 1099 consignors (eBay is) BUT under existing law, the consignors are required to declare the income they receive from sales. If someone is receiving big consignment checks and declares nothing, and if that person is subsequently audited and the facts emerge, not only will there be a hefty penalty, there is a real chance of a criminal referral for tax evasion, and that is one of the most successful Federal prosecution categories. A person indicted for tax fraud is basically toast. The IRS reported a 91.2% conviction rate in 2019. Tax evasion isn't worth the risk.

Agree completely, the issue is your income, not what happens to get reported independently.

[BobC]

Originally Posted by obcbobd

I don't follow your logic. $50K or cards or $50K of cash, how are they treated differently for tax purposes? If you sell the card ten years later for $60K, you have to declare the $10K profit. Same if you invest $50K in a fund and you sell those shares later for $60K, you have a profit of $10K

I guess it would be easier to sell the cards and not declare anything. Also a lot more work.

Bob,

I think what Johnny was really asking was more along the lines of if it is better to make a gift during one's lifetime, or wait and pass an item through to one's heirs at death.

Plus, what you are saying is not necessarily entirely correct as there can be a very huge difference between gifting or leaving your kids $50K of cards or $50K of cash. Did you ever consider the very distinct possibility that the person gifting/leaving the cards to his kids may have actually paid a much lower amount for them, and therefore their tax basis in them is way lower than $50K? Or in the case of some of these ridiculously priced ultra-modern cards it is even possible the tax basis could be much higher, and the card values have since dropped down to just $50K. Either way, that differing tax basis in the owner's hands can have a significant effect on what may be the best course of action for the cards' owner to transfer these cards, or at least their value, to his kids. In my next post I'll respond to Johnny's original question and explain further and in more detail.

[insidethewrapper]

I agree completely. Pay your taxes. I was wondering how much Uncle Sam lost in revenue at the National with all those "Cash Only" sales.

[Johnny630]

Originally Posted by BobC

Bob,

I think what Johnny was really asking was more along the lines of if it is better to make a gift during one's lifetime, or wait and pass an item through to one's heirs at death.

Plus, what you are saying is not necessarily entirely correct as there can be a very huge difference between gifting or leaving your kids $50K of cards or $50K of cash. Did you ever consider the very distinct possibility that the person gifting/leaving the cards to his kids may have actually paid a much lower amount for them, and therefore their tax basis in them is way lower than $50K? Or in the case of some of these ridiculously priced ultra-modern cards it is even possible the tax basis could be much higher, and the card values have since dropped down to just $50K. Either way, that differing tax basis in the owner's hands can have a significant effect on what may be the best course of action for the cards' owner to transfer these cards, or at least their value, to his kids. In my next post I'll respond to Johnny's original question and explain further and in more detail.

Thanks Bob !

[BobC]

Originally Posted by Johnny630

So what’s better for your family? Dying with the cards and passing them on through an estate or selling them prior and gifting the money to them?

Seems like if they’re in your will to be passed down croaking with cards is a better tax situation for your heirs.

Johnny,

There is no one correct answer to your question, and the best and most advantageous way to pass on cards to one's heirs depends on a multitude of factors, starting with what would that person's estate be worth today if they passed away, including all the assets they own, not just the cards. Then you'd start considering different factors like is the person married, how many kids/heirs are there, and on and on and on. To hopefully demonstrate and explain a little better how just leaving cards to your kids in your will may not always be the best strategy, I'll provide some examples.

First off though, there's a third very realistic option that you didn't even mention in your original question. Instead of selling one's cards and then gifting the cash to your kids, you can also forego selling them and just gift the cards themselves, and then leave it up to your kids if they want to sell them or not. So having established that, there are basically three different options you can use for passing on cards, or their value. to your kids.

1. You sell the card, and then gift the sales proceeds to your kid.

2. You gift the card to your kid.

3. You leave the card to your kid in your will when you die.

And to try and simplify things for my examples, I'm going to say there is just one card to be left to a single kid, you are single at the time of your gift/death, and that one card is a very high grade '52 Topps Mantle and has a current FMV of $10M at the time of your gift/death, but when you acquired it years ago, you only paid $100K for it. And I'm going to ignore state and local taxes and just talk about federal taxes, and assume the death/gifting happens in 2022, so we'll use current 2022 tax rates.

Under Option #1, you sell the card and recognize a $9.9M gain, which we'll say for simplicity's sake is fully taxable at the max LTCG rate of 20%. So you end up paying $1.98M in federal income tax, and then gift the remaining $8.02M to you kid. Now for gift tax purposes, the first $16K of that cash is covered by the annual gift tax exclusion, so there is no gift tax on it. But that means you still have $8.004M of excess gifts this year. But instead of having to pay any current gift tax on it, you can offset the excess gift amount against your lifetime estate and gift tax exemption of $12.06M. That takes your remaining lifetime estate and gift exemption down to $4.056M going forward till at least the end of the year. So now if you died the day after making the gift to your kid, your estate would end up paying federal estate tax only if its remaining net taxable FMV (sans the card you just gifted the day before) still exceeds that $4.056M amount, at an up to 40% max federal estate tax rate. Meanwhile, your kid now has $8.02M of cash that they owe no tax on, and are free and clear to do with as they wish.

Under Option #2, you simply gift the card as it is to your kid. You somehow establish and report the card's value for gift tax purposes as $10M so, for federal gift tax purposes the first $16K of gifted value is covered by the annual gift tax exclusion of that same amount, leaving an excess gift of $9.984M. And instead of you currently paying any gift tax on this excess gift, as was done in Option #1, you simply offset and reduce this excess gift amount against your lifetime estate and gift tax exemption amount of $12.06M. Doing so reduces that lifetime exemption amount for you going forward down to $2.076M. Meanwhile, your kid now owns a $10M card free and clear. But, because it was a gift to them during your lifetime, there is no "stepped-up" tax basis for your kid to the card's then current $10M FMV. Instead, they get what is called a "carryover" tax basis, which is the same tax basis you had in the card at the time of the gift, which we said was $100K. Now if/when your kid goes and sells the card, they will likely owe a capital gain tax on the profit difference between that $100K tax basis and what it eventually sells for. So if your kid decides to sell the card the day after you gifted it to them, for simplicity we'll again assume the sale results in a LTCG subject to a max federal tax rate of 20%, which would be the same $1.98M capital gain we came up with had you sold the card as in Option #1. However, in this case, it is your kid that owes the tax, not you. And if your kid wanted otherwise, they could hold onto the card as long as they wanted without paying or owing any taxes. And being their father, I wouldn't be too surprised if they'd occasionally let you hold onto and enjoy the card whenever you wanted. So in this instance, you will have succeeded in passing the card on to your kid, and further delaying and postponing any tax liability on its potential future appreciation.

Under Option #3, you pass away, and your kid inherits the card. Assuming you previously haven't used up any of your lifetime estate and gift tax exclusion of $12.06M, and the rest of the net taxable value of your estate is under $2.06M, your total estate is covered by that lifetime estate and gift tax exemption amount, and your estate doesn't owe or pay any federal estate tax. And in addition, because the card passed through your estate, your kid now owns the card free and clear of any tax liability, and with a "stepped-up" tax basis of $10M. Then if the day after they inherited the card your kid then sold it for the $10M it was worth, that equals their "stepped-up" tax basis so they have $0 gain, and $0 federal income tax due, but now they would have $10M cash free and clear to do with as they wished.

Based on just this simple scenario and examples, it sure seems Option #3 would always be the way to go, right? Well, in one of my earlier posts I mentioned how the sunset rules built into the tax act that Trump signed back in 2017 were going to take effect in 2025, with no one having to do anything. And as part of that, the lifetime estate and gift tax exemption amount is going to be drastically cut, possibly by upwards of $6M or more. So instead of the current $12.06 lifetime estate and gift tax exemption being in effect, let's say you wait for 2025 for this scenario and these different options to happen, and now the lifetime estate and gift tax exemption amount is only $6M. Now if you go back and recalculate some of those potential estate and gift taxes due from my earlier examples above, they're going to end up being a hell of a lot more in some cases.

For example, if you gift the card to your kid as in Option #2, it's $10M value, less the $16K annual gift tax exclusion amount, is now way over the new $6M lifetime estate and gift tax exemption amount. That means by making that gift, you've run down your remaining lifetime estate and gift tax exemption amount to $0 going forward, and will currently owe federal gift tax (at up to a 40% max rate) on the $3.984M ($10M - $16K - $6M) excess that is now subject to a gift tax. And since the card in this case was a gift, your kid still gets stuck with a "carryover" tax basis from you of $100K. So if they then sold the card for $10M the day after receiving it as a gift, they will also now currently owe income tax on the $9.9M capital gain they just got from selling it. So if I assume that entire gain was taxed at the max 20% LTCG rate, that means the kid will owe $1.98M ($9.9M X 20%) of income tax on the card's sale, leaving them with $8.02M of cash, free and clear. But now, you have to figure out how to pay the gift tax of upwards of $1.5M because you gifted your kid the card. That reduces your current assets/cash and potentially what you would otherwise be able to leave to the kid in the future when you eventually pass on. It can also create a huge issue if you don't currently have that kind of cash available with which to pay the gift tax that would then be due.

Similarly, if you instead passed away in 2025, the card's $10M value alone would exceed the then newly reduced lifetime estate and gift tax exemption amount I estimated at $6M, but you'd also lose the $16K annual gift tax exclusion as well. So now the card's value alone creates a taxable estate of at least that $4M ($10M - $6M) difference, and your estate would end up having to pay an up to 40% estate tax on that $4M excess value of the card over your lifetime estate and gift tax exemption amount. The good news under this Option #3 scenario though is that the "stepped-up" basis rules (at least for now) are still in place so your kid would inherit a "stepped-up" tax basis of $10M on the card, and could then sell it then next day after inheriting it for that same $10M and have $0 gain and $0 tax due. But the bad news maybe is, what if that card is the only real valuable asset in your estate. Rather than being able to pass the card on to your kid, the estate's executor/fiduciary may be forced to sell the card in order to generate the funds needed to pay the estate tax now owed by the estate, and only pass the remaining cash on to your kid then. Or if the executor/fiduciary did pass the card on to your kid, they'd need to make sure your kid immediately sells it so they can pass the money back to the estate to cover the federal estate tax due. And if generating that cash to pay the tax bill takes too long, the federal estate tax payment can end up being paid late, potentially incurring additional interest and penalty charges on top of the actual estate tax due. So under some circumstances like these, even if the original intentions of all parties involved was for your kid to inherit and then keep the card in the family, they may not be able to.

And one last thing to also consider. When that lifetime estate and gift tax exemption does eventually get cut in 2025, or has any other earlier or later reductions to it as politicians fight and argue about it in Washington, once that exemption is cut those potential tax savings are gone. So if you have this same $10M card come 2024, and see that the following year they're going to cut say $6M from the lifetime estate and gift tax exclusion amount, you may want to go ahead and make the gift of that card in 2024 to take advantage of the higher exemption amount. Once they cut the exemption amount, the government and the IRS can't go back and suddenly make you pay federal gift (or estate) taxes on prior gifts (or estate value) that now would exceed the newly lowered exemption amount. So in this instance, again depending on all the other contributing facts and circumstances involved, waiting till you pass away to leave your kids some cards may not always be the best way to go after all.

Hope this helps to make it more understandable. And sorry for all the detail and length it sometimes takes to explain these things. I've barely touched on all the different factors and circumstances that could influence and impact a question like yours. And even then, what I'm telling you now could change entirely in the coming weeks, months and years. And when it comes to taxes and tax laws, the only thing that is never changing.........is that they are always changing!

[ruth-gehrig]

Bob you're pretty awesome! Your posts make learning about taxes, and these various scenarios, interesting

[Johnny630]

Originally Posted by BobC

Johnny,

There is no one correct answer to your question, and the best and most advantageous way to pass on cards to one's heirs depends on a multitude of factors, starting with what would that person's estate be worth today if they passed away, including all the assets they own, not just the cards. Then you'd start considering different factors like is the person married, how many kids/heirs are there, and on and on and on. To hopefully demonstrate and explain a little better how just leaving cards to your kids in your will may not always be the best strategy, I'll provide some examples.

First off though, there's a third very realistic option that you didn't even mention in your original question. Instead of selling one's cards and then gifting the cash to your kids, you can also forego selling them and just gift the cards themselves, and then leave it up to your kids if they want to sell them or not. So having established that, there are basically three different options you can use for passing on cards, or their value. to your kids.

1. You sell the card, and then gift the sales proceeds to your kid.

2. You gift the card to your kid.

3. You leave the card to your kid in your will when you die.

And to try and simplify things for my examples, I'm going to say there is just one card to be left to a single kid, you are single at the time of your gift/death, and that one card is a very high grade '52 Topps Mantle and has a current FMV of $10M at the time of your gift/death, but when you acquired it years ago, you only paid $100K for it. And I'm going to ignore state and local taxes and just talk about federal taxes, and assume the death/gifting happens in 2022, so we'll use current 2022 tax rates.

Under Option #1, you sell the card and recognize a $9.9M gain, which we'll say for simplicity's sake is fully taxable at the max LTCG rate of 20%. So you end up paying $1.98M in federal income tax, and then gift the remaining $8.02M to you kid. Now for gift tax purposes, the first $16K of that cash is covered by the annual gift tax exclusion, so there is no gift tax on it. But that means you still have $8.004M of excess gifts this year. But instead of having to pay any current gift tax on it, you can offset the excess gift amount against your lifetime estate and gift tax exemption of $12.06M. That takes your remaining lifetime estate and gift exemption down to $4.056M going forward till at least the end of the year. So now if you died the day after making the gift to your kid, your estate would end up paying federal estate tax only if its remaining net taxable FMV (sans the card you just gifted the day before) still exceeds that $4.056M amount, at an up to 40% max federal estate tax rate. Meanwhile, your kid now has $8.02M of cash that they owe no tax on, and are free and clear to do with as they wish.

Under Option #2, you simply gift the card as it is to your kid. You somehow establish and report the card's value for gift tax purposes as $10M so, for federal gift tax purposes the first $16K of gifted value is covered by the annual gift tax exclusion of that same amount, leaving an excess gift of $9.984M. And instead of you currently paying any gift tax on this excess gift, as was done in Option #1, you simply offset and reduce this excess gift amount against your lifetime estate and gift tax exemption amount of $12.06M. Doing so reduces that lifetime exemption amount for you going forward down to $2.076M. Meanwhile, your kid now owns a $10M card free and clear. But, because it was a gift to them during your lifetime, there is no "stepped-up" tax basis for your kid to the card's then current $10M FMV. Instead, they get what is called a "carryover" tax basis, which is the same tax basis you had in the card at the time of the gift, which we said was $100K. Now if/when your kid goes and sells the card, they will likely owe a capital gain tax on the profit difference between that $100K tax basis and what it eventually sells for. So if your kid decides to sell the card the day after you gifted it to them, for simplicity we'll again assume the sale results in a LTCG subject to a max federal tax rate of 20%, which would be the same $1.98M capital gain we came up with had you sold the card as in Optin #1. However, in this case, it is your kid that owes the tax, not you. And if your kid wanted otherwise, they could hold onto the card as long as they wanted without paying to owing any taxes. And being their father, I wouldn't be too surprised if they'd occasionally let you hold onto and enjoy the card whenever you wanted. So in this instance, you will have succeeded in passing the card on to your kid, and further delaying and postponing any tax liability on its potential future appreciation.

Under Option #3, you pass away, and your kid inherits the card. Assuming you previously haven't used up any of your lifetime estate and gift tax exclusion of $12.06M, and the rest of the net taxable value of your estate is under $2.06M, your total estate is covered by that lifetime estate and gift tax exemption amount, and your estate doesn't owe or pay any federal estate tax. And in addition, because the card passed through your estate, your kid now owns the card free and clear of any tax liability, and with a "stepped-up" tax basis of $10M. Then if the day after they inherited the card your kid then sold it for the $10M it was worth, that equals their "stepped-up" tax basis so they have $0 gain, and $0 federal income tax due, but now they would have $10M cash free and clear to do with as they wished.

Based on just this simple scenario and examples, it sure seems Option #3 would always be the way to go, right? Well, in one of my earlier posts I mentioned how the sunset rules built into the tax act that Trump signed back in 2017 were going to take effect in 2025, with no one having to do anything. And as part of that, the lifetime estate and gift tax exemption amount is going to be drastically cut, possibly by upwards of $6M or more. So instead of the current $12.06 lifetime estate and gift tax exemption being in effect, let's say you wait for 2025 for this scenario and these different options to happen, and now the lifetime estate and gift tax exemption amount is only $6M. Now if you go back and recalculate some of those potential estate and gift taxes due from my earlier examples above, they're going to end up being a hell of a lot more in some cases.

For example, if you gift the card to your kid as in Option #2, it's $10M value, less the $16K annual gift tax exclusion amount, is now way over the new $6M lifetime estate and gift tax exemption amount. That means by making that gift, you've run down your remaining lifetime estate and gift tax exemption amount to $0 going forward, and will currently owe federal gift tax (at up to a 40% max rate) on the $3.984M ($10M - $16K - $6M) excess that is now subject to a gift tax. And since the card in this case was a gift, your kid still gets stuck with a "carryover" tax basis from you of $100K. So if they then sold the card for $10M the day after receiving it as a gift, they will also now currently owe income tax on the $9.9M capital gain they just got from selling it. So if I assume that entire gain was taxed at the max 20% LTCG rate, that means the kid will owe $1.98M ($9.9M X 20%) of income tax on the card's sale, leaving them with $8.02M of cash, free and clear. But now, you have to figure out how to pay the gift tax of upwards of $1.5M because you gifted your kid the card. That reduces your current assets/cash and potentially what you would otherwise be able to leave to the kid in the future when you eventually pass on. It can also create a huge issue if you don't currently have that kind of cash available with which to pay the gift tax that would then be due.

Similarly, if you instead passed away in 2025, the card's $10M value alone would exceed the then newly reduced lifetime estate and gift tax exemption amount I estimated at $6M, but you'd also lose the $16K annual gift tax exclusion as well. So now the card's value alone creates a taxable estate of at least that $4M ($10M - $6M) difference, and your estate would end up having to pay an up to 40% estate tax on that $4M excess value of the card over your lifetime estate and gift tax exemption amount. The good news under this Option #3 scenario though is that the "stepped-up" basis rules (at least for now) are still in place so your kid would inherit a "stepped-up" tax basis of $10M on the card, and could then sell it then next day after inheriting it for that same $10M and have $0 gain and $0 tax due. But the bad news maybe is, what if that card is the only real valuable asset in your estate. Rather than being able to pass the card on to your kid, the estate's executor/fiduciary may be forced to sell the card in order to generate the funds needed to pay the estate tax now owed by the estate, and only pass the remaining cash on to your kid then. Or if the executor/fiduciary did pass the card on to your kid, they'd need to make sure your kid immediately sells it so they can pass the money back to the estate to cover the federal estate tax due. And if generating that cash to pay the tax bill takes too long, the federal estate tax payment can end up being paid late, potentially incurring additional interest and penalty charges on top of the actual estate tax due. So under some circumstances like these, even if the original intentions of all parties involved was for your kid to inherit and then keep the card in the family, they may not be able to.

And one last thing to also consider. When that lifetime estate and gift tax exemption does eventually get cut in 2025, or has any other earlier or later reductions to it as politicians fight and argue about it in Washington, once that exemption is cut those potential tax savings are gone. So if you have this same $10M card come 2024, and see that the following year they're going to cut say $6M from the lifetime estate and gift tax exclusion amount, you may want to go ahead and make the gift of that card in 2024 to take advantage of the higher exemption amount. Once they cut the exemption amount, the government and the IRS can't go back and suddenly make you pay federal gift (or estate) taxes on prior gifts (or estate value) that now would exceed the newly lowered exemption amount. So in this instance, again depending on all the other contributing facts and circumstances involved, waiting till you pass away to leave your kids some cards may not always be the best way to go after all.

Hope this helps to make it more understandable. And sorry for all the detail and length it sometimes takes to explain these things. I've barely touched on all the different factors and circumstances that could influence and impact a question like yours. And even then, what I'm telling you now could change entirely in the coming weeks, months and years. And when it comes to taxes and tax laws, they only thing that is never changing.........is that they are always changing!

Thanks Bob. This is very informative detailed information, I love it !

[BobC]

Originally Posted by Directly

I assume this discussion is referring to only one card, what about 50 cards --- does each card need to be listed and valued separately in the will or can we show a lump sum of value?--50 cards valued at $$$$.

Great question Tom. I've only been using a single card in my scenarios and examples to keep things simple and easier to explain. But you're absolutely right, if there are multiple cards, then you are technically supposed to figure out and keep track of the tax basis of each separate card. That way, if you break out and only sell one, or even just a few, of the cards inherited, you can properly list the tax basis when you report their sales.

Just to be technically correct, the value of the cards would most likely not be shown in the will, nor would I expect them to be specifically listed, unless the inheritance was of a rather small collection of really significant cards, like say a T206 Wagner or '52 Topps Mantle maybe. A person's will can be written at any time, many years before they pass on. And the values of particular items, say in someone's card collection, can obviously change over time, along with the actual cards in that collection as well. No one is going to keep going back and be constantly re-writing and amending their will (and paying their attorney to do so) just to update the value of their card collection, or likely the list of all the specific cards in it. At least no sane person I've ever met or heard of. LOL

Having said that, if the will just says I leave my card collection to my son/daughter, that is it, there is no listed value or inventory. In that case, it is really up to the executor/fiduciary in charge of the decedent's estate to inventory and take control of all the decedent's assets and debts, determine the value of all those items for potential estate tax purposes, and to then see to it that the terms of the will are carried out to the extent legal and possible, in accordance with the laws of the state the estate is in. Chances often are that one of the beneficiaries may also be the executor/fiduciary, or not. Regardless, I normally wouldn't expect the executor/fiduciary to even try and determine specific values for every single card in larger collections. This is where if it's your collection, it can really help your family out to have an inventory or some kind of listing of what all is in it to assist in the valuation that may be needed for your estate's purposes after you pass. Or alternatively, in determining the values to be used for coming up with the "stepped-up" tax basis of the cards for your heirs. Most likely though, if someone's net taxable estate value in total is going to be nowhere near the amount that would require any federal estate tax return be filed, or estate tax paid, the executor/fiduciary will likely not waste much time or energy in seeking appraisals and such, and will just do whatever the probate court overseeing the estate minimally requires of them. In all honesty, if the will doesn't even mention a card collection, or if there isn't a will at all, I wouldn't be surprised if the collection just suddenly turns up in the possession of a son(s)/daughter(s), with no one telling the probate court anything about it at all.

So unless in the extreme rare occasion that an executor/fiduciary would get specific inherited cards appraised and valued, it will most likely be up to whomever actually inherits the cards to figure out (and if needed estimate as best they can) the then current FMV of the cards they just inherited. And in the case of something like say a set, or partial set, where they maybe come up with an overall valuation for the entire set/lot, when they go to sell it, maybe back out the superstar/HOFer cards and separately value them, and then just take the remaining balance of the overall appraised value of the set/lot, and average it out over how many cards are left.

In other words, say you have some set/lot of 50 cards you inherited, probably worth about $2,000 according to some pricing guides, dealers, etc. You pull out the maybe 10 HOF/major rookie cards in the set and figure the FMV of each, and when you add them up it totals $900. So for the valuation of the remaining 40 common cards in the set, I'd calculate the average value per card as follows:

$2,000 - $900 = $1,100 / 40 cards = $27.50 per card

For something like this, the best you are probably going to be able to do is to estimate values just like as in my above example. And if the executor/fiduciary of the estate does come up with an overall valuation/appraisal for the card collection, be sure to use that as your overall starting point to then be divvied up between all the different cards in the collection. Just like in my example above. if the entire collection were valued by the executor/fiduciary at $2,000, and you could really only find say 10 cards worth individually valuing and selling. Just spread the rest of the remaining collection value evenly over the rest of the cards. Just be sure to write what you're doing down so you have some record as to your method and logic. And be sure keep track of the cards you sell and what you sell them for.

And if on the off chance you ever did have to explain what you did to an IRS agent, they most likely will have no clue as to what you're talking about, or if they do know, will realize what an impossible PITA it is for you to be able to create completely accurate records, and will likely give you the benefit of the doubt and agree with you as long as what you're doing seems at least somewhat reasonable and consistent. Unless you do end up inheriting some really, really big value cards, IRS agents aren't likely going to waste a lot of time and effort, if any, questioning your estimating their valuations when you sell them.

Hope this helps.

[BobC]

Originally Posted by ruth-gehrig

Bob you're pretty awesome! Your posts make learning about taxes, and these various scenarios, interesting

LOL

Not sure I've ever heard someone talk about this kind of stuff being interesting before. It can often be extremely complex, with an awful lot of gray areas though. Most people think tax law is pretty much black and white, but that is so far from the truth. In my case, I have the advantage of having been involved with so many different people and their tax situations over the last 4-5 decades that I can probably relate to and talk about almost anything people on here will ask about.

Hopefully at least a few members will get some answers to tax and/or estate related questions they may have in regards to their collections and activities. I apologize to those that may take offense at my "six walls of text" in trying to answer and explain different things. But if you take the time to read and follow what I'm saying, you'll quickly realize that real short and quick one or two line answers usually won't cut it, and can often end up giving the wrong or an incomplete answer to someone's question. Plus, I've always felt that the more someone knows about the true and complete background behind things, the better they can then understand and appreciate how they truly work.

[BobC]

In regard to some of the earlier comments in this thread concerning auctions houses, and their treatment/implications for tax purposes, it has already been discussed in other threads how technically an AH does not have to issue a 1099 form to people consigning items to them. People or companies that buy or pay for certain types of income or services are normally required to issue specific types of 1099s to the people/entities they paid (along with copies to the IRS), after reaching threshold amounts.

Technically, it is not the AH that pays and buys items from their consignors. It is the people who won the auctions who are actually paying the consignors. All the AH does is act as a sort of agent on behalf of the consignors, and simply collects the monies for them, and forwards it to the consignors, sans the AH's commissions and fees of course. Plus, there actually is no 1099 requirement to report any sales of tangible personal property, which is primarily all that most AHs deal in and sell. On other seller platforms, like Ebay, the 1099 reporting isn't because of what was paid for the tangible personal property being sold. The 1099s are issued and reported because of the payments from buyers going through a third-party payment service or platform (like Paypal) that handles and ultimately remits the moneys coming from buyers to the sellers through special accounts set up on and for a seller's behalf.

This is most likely why you don't see many AHs accepting payments from auction winners via these third-party payment platforms/methods, like Paypal and Venmo. Because if they did, these payment platforms would be required to send 1099s to the AHs reporting the total gross sales proceeds they paid to them. But the AH's actual taxable income is really only the commission/fees portion of that money they collected on behalf of their consignors, not the entire amount that they would have reported on the 1099s they'd get from those third-party payment platforms. And because they'd have those entire gross payment amounts reported to them on 1099s, the AHs would also have to report those same 1099 amounts as gross income on their federal income tax returns. And since only a portion of those gross reported sales were actually taxable income to the AHs, that means they would have to now declare and report some tax deduction or expense on their tax returns as well, showing the amount of money they actually paid to their consignors. So now if/when an IRS agent contacted an AH about their tax return, they could ask them what that big expense deduction was on their return. And when the AH responds that it was payments to consignors for money that was incorrectly reported as income to the AH on 1099s from third-party payment services, the agent can simply ask, "Prove it!". And now the agent can request and make the AH give them names, addresses, and amounts paid to consignors, so the IRS can validate and verify what the AH deducted, and then also go double check the returns of those consignors to make sure they properly reported as sales income on their tax returns, the exact same amounts the AH claimed as deductions on theirs.

Actually, there is a long-standing tax rule that when someone receives a 1099 reporting income that is not all theirs, and/or received on behalf of someone else, they are considered and referred to as a "nominee". And to properly report to the IRS the portion of that "nominee" income that isn't theirs (or in this case the AH's), and to also properly inform the true recipient of the income amount they are supposed to be reporting, the "nominee" is supposed to issue a 1099 to the person/party for their share of the 1099 income originally reported to them. And now you know why many AHs likely don't accept Paypal and Venmo. So they aren't forced to turn around and report to the IRS on 1099-nominee forms what their consignors actually received.

Truth is, if there are any 1099s to possibly be sent to anyone, it would be from a consignor to the AH to report the commissions/fees in excess of $600 in any calendar year paid to the AH for the services they performed for the consignor. (But that would only be the case if the AH wasn't incorporated. A 1099-MISC form is not required to be sent to incorporated entities.)

[parkplace33]

Great information, thanks all!