Friends giving up collecting in 2023 - Post continuation

[Fred]

Originally Posted by raulus

Your heirs do get a step up to FMV at your death. At least under current law! Every once in a while there will be proposals to poke at this, but no changes yet.

So, bottom line with the FMV at death - When (not IF) someone who has a large collection dies, then it's possible the cards can be sold at the current market value at the time of the collectors death without tax implications assuming the following is correct:

There is a federal threshold level at which an inheritance tax is not charged.
IF the total inheritance valuation (including the card collection at the FMV at time of death) is below the federal threshold, then no taxes would be due on the sale of the collection. However, if the collection is held for a year and the FMV increase by 10%, then the heirs would be liable to pay taxes on the 10% gain.

Is that correct?

I'm not a tax expert, so I'm just making assumptions and guessing here.

[Exhibitman]

My understanding is that all property you inherit steps up in basis to FMV at the time of death (or the alternative valuation date, if the estate uses one). When you inherit and sell, the FMV is the basis to use when calculating gains or losses. if you inherited a PSA 10 Michael Jordan RC the day after one sold for over $700K your basis in the card is that auction price, and you could sell it at current market of about $200K and not only not pay income tax on the sale, you would have a loss carryover that would gobble up investment income for years to come.

How you sell can alter the outcome even more favorably; I will be addressing this in my column in the future. New posts go up Saturdays.

[raulus]

Originally Posted by Fred

So, bottom line with the FMV at death - When (not IF) someone who has a large collection dies, then it's possible the cards can be sold at the current market value at the time of the collectors death without tax implications assuming the following is correct:

There is a federal threshold level at which an inheritance tax is not charged.
IF the total inheritance valuation (including the card collection at the FMV at time of death) is below the federal threshold, then no taxes would be due on the sale of the collection. However, if the collection is held for a year and the FMV increase by 10%, then the heirs would be liable to pay taxes on the 10% gain.

Is that correct?

I'm not a tax expert, so I'm just making assumptions and guessing here.

Maybe said another way:

If your heirs sell at your death, then there should be no tax, because their basis was stepped up to FMV at your demise, and FMV should equal the sales price.

If your heirs wait to sell, then they may owe tax, depending on how much the collection has appreciated, if at all.

[Fred]

Originally Posted by Exhibitman

My understanding is that all property you inherit steps up in basis to FMV at the time of death (or the alternative valuation date, if the estate uses one). When you inherit and sell, the FMV is the basis to use when calculating gains or losses. if you inherited a PSA 10 Michael Jordan RC the day after one sold for over $700K your basis in the card is that auction price, and you could sell it at current market of about $200K and not only not pay income tax on the sale, you would have a loss carryover that would gobble up investment income for years to come.

How you sell can alter the outcome even more favorably; I will be addressing this in my column in the future. New posts go up Saturdays.

Adam, are you a tax attorney?

I never really thought about it the way you described (frigging great idea). I wonder if the losses (as described in your post - $500K) could also be used to offset stock gains? If so - wow, seems like something to consider when planning investment strategies.

Well, I guess we'd be planning strategies for our families because for them to inherit the stuff, we'd have to be dead...

[raulus]

Originally Posted by Fred

I never really thought about it the way you described (frigging great idea). I wonder if the losses (as described in your post - $500K) could also be used to offset stock gains? If so - wow, seems like something to consider when planning investment strategies.

Their ability to use the losses all depends. This article is helpful:

https://bradfordtaxinstitute.com/Con...ctivities.aspx

[BobC]

As Nic and Adam have already mentioned, when a person passes away, under CURRENT tax law, the value of all items in their estate are stepped-up in tax basis to their current FMV on the person's date of death. Or as Adam alluded to, there is also the possibility to select an alternative valuation date. However, you can't take such a simple statement as always true.

The Executor of a deceased person's estate can make such an election to have items in the estate that are distributed, sold, exchanged, or otherwise disposed of within six months of the decedent's date of death, valued at their FMV on the date of such distribution, disposal, etc. Any items in the estate that are not distributed, sold, exchanged, or otherwise disposed of within that same six-month period after the decedent's date of death get valued at their FMV on the last day of that six-month period instead. To be able to make this alternative valuation election though, it must be remembered that is covers a person's entire estate, it can not be used apply it to only certain assets that you pick and choose. It covers the entire estate, or none of the estate at all. Also, the alternative valuation date election can only be made if it ends up reducing the estate's overall value and the estate taxes imposed on it. If a decedent's estate doesn't end up owing any federal estate tax, it can't make the alternative valuation date election.

And for the vast majority of people on Net54, I'm guessing you won't have to worry about this at all. Similar to the Standard Deduction we all got on our annual federal income tax returns where the first $XXXX of taxable income we make every year is exempt from federal income tax, there is a somewhat similar federal inheritance estate tax exemption that every U.S. citizen has. And like the Standard Deduction, it is subject to change each year, usually going up. Under current tax laws, this exemption amount for everyone in 2023 is $12.92 million. And if you're married, your estate can most likely take advantage of a doubled exemption of $25.84 million then. So for most of us, no need to even think about an Alternative Valuation Date.

So, for those of you to maybe better understand, the reasoning behind the Stepped-Up Basis concept is that a person's estate is subject to federal inheritance tax (and some state inheritance taxes as well) based on the value of their total estate, less some allowable expenses/deductions that I'm not even going to try and get into. Once those estate assets have been subjected to this federal estate tax, the tax basis of those estate assets then transferred over to the decedent's heirs is considered that same current FMV so as not to subject those assets and heirs to potential double taxation. In other words, if Grandpa bought some stock for $1 a share, and it was worth $100 a share when he died, for federal estate tax purposes it gets valued and taxed at the then current FMV of $100 a share. Now if they forced a grandchild that was left that stock to continue using their deceased Grandfather's $1 per share tax basis, then when they sold it for $100 a share, they'd end up having to pay tax on that $99 gain, basically taxing that stock a second time. That is what is meant by double taxation. So instead, the grandchild gets a new, stepped-up tax basis equal to the $100 a share they originally used to tax the Grandfather's estate for that stock. So now in the future, the grandchild would only have to pay tax on gain if they sold that stock for more than $100 a share. And if the stock price dropped and it ended up being sold for less than $100 a share, the grandchild could recognize the loss and use that to offset other income on their income taxes.

The main thing people need to realize and remember is that these only represent CURRENT tax laws. These can, and do, change over time. The federal estate tax exemption is at an all-time high and has more than doubled since Trump took office. In fact, many may remember one of his opponent, Hillary Clinton's, campaign goals/proposals was to reduce this federal estate tax exemption down to just $1 million, an amount which would have made an enormous number of people's estates liable for federal estate taxes since then. I actually had clients where we had discussed and made plans to immediately initiate changes to their estates and planning should Hillary win the election. And right after Biden took office, do any of you remember some of the proposed ideas he and his administration were supposedly tossing around about again reducing the federal estate tax exemption amount, and possibly even doing away with the stepped-up tax basis of inherited assets?

Here is a look at the current 2023 tax brackets and rates for federal estate tax purposes, with a top rate of 40%. Given the value today of people's homes, 401K/pension accounts, and even some card collections, having an estate value of $1 million is not that impossible to reach. Keep that in mind if future administrations ever do decide to cut the federal estate tax exemption, and/or do away with the stepped-up basis rules.

https://smartasset.com/taxes/all-about-the-estate-tax

The main thing to remember is that if you think you're going to have an estate with a significant value at some point, keep an eye on the federal estate tax laws and rules in place, and any proposed or actual changes to them in the future. Looking to talk with a licensed, knowledgeable tax professional may also be a good (and more often necessary) idea to assist in estate planning and/or any questions you may have. Remember, there is no perfect, exact, one size fits all, answer to people when it comes to their tax and estate questions and issues. Everyone has a completely different and unique tax and estate situation, and you need to look at ALL aspects and components of each person's tax/estate situation before ever even beginning to think you can properly start to answer all their questions.

Oh, also remember, if you decide to gift cards to someone while still living, your tax basis carries over to the person you're giving them to. In my Grandpa story above, that means the grandkid has the same $1 per share tax basis in the stock that Grandpa did. Only if you wait to let a card be inherited by someone do they get the basis step-up. There is some more I could go into and explain about the pros/cons of gifting versus inheriting, and how gifting can also affect one's federal estate tax exemption, but all the TLDR people with the ASOAG are probably getting ready to pounce!

[BobC]

Originally Posted by Fred

Adam, are you a tax attorney?

I never really thought about it the way you described (frigging great idea). I wonder if the losses (as described in your post - $500K) could also be used to offset stock gains? If so - wow, seems like something to consider when planning investment strategies.

Well, I guess we'd be planning strategies for our families because for them to inherit the stuff, we'd have to be dead...

Fred,

Before you go jumping for joy at the ideas presented, keep in mind that the situation presented about the Jordan card is an absolute extreme, and the chances of lucking out and having such a situation occur are probably about the same as winning the lottery. For things like stocks that are inherited, there is a stock market to easily set a then current value on the day someone passes. For other assets without such perfect, liquid markets, you can't just necessarily say it is worth what you say it is. If significant value is involved with non-liquid, non-cash estate assets, the estate Executor is most likely going to need to get an actual, licensed appraiser involved as part of their obligation to file an estate tax return. And if the estate isn't even close to large enough to where a federal estate tax return is required to be filed, the Executor may still want to look into an appraiser to value some of the more valuable non-cash assets so the heirs don't run into potential tax issues down the road. Like the IRS seeing someone claim a $500K loss on their tax return from selling a single card. And even if the party can point to a single sale around the time the decedent leaving them the card passed, the IRS may still take exception to that simplistic valuation given the nature and volatility of the collectibles market, and call in an appraiser of their own.

The article Nic linked to goes on about basically the same thing I've been telling people all along here on the forum as to how there are basically three different types of taxpayers people that are into cards can be treated as for tax purposes. As either a Collector/Hobbyist, as an Investor, or as a Seller/Dealer. And I've also said I believe it is possible for someone to actually be all three at the same time. They just have to keep really detailed and accurate records to back up and support how they may have cards as part of a business inventory, another group as part of a personal collection, and even another group held as potential investments. I'm not even going to try and explain all the nuances and differences here. Just understand that they can, and do, exist.

And as for that potential $500K loss being a tax deduction, that would only be in the case of the taxpayer claiming the loss being treated as either an Investor, or as a Seller/Dealer in an actual business. If an Investor, the loss would be a long-term capital loss, and the taxpayer could offset any other net long-term capital gains on their return that year, dollar-for-dollar, against the $500K loss. Any leftover loss would then be allowed on the taxpayer's current return up to $3,000 against all other taxable income. And if there was still any remaining, unused loss from the $500K, that would get carried forward to be deducted against net long-term capital gains on future returns, plus an additional $3,000 deduction against all other taxable income per year, until the entire $500K is finally used up, or the person passes away.

If the person is a Dealer/Seller in a business, the $500K is a business loss deductible against all income, not just capital gains. But the party inheriting the card would have had to have been in business to try and take advantage of that.

Most likely, the person inheriting the card was neither a Seller/Dealer nor an actual card Investor. In which case the IRS would look to treat them as a Collector/Hobbyist selling a collectible card. The max federal tax rate on a long-term capital gain from the sale of a collectible card in that case is currently 28%. But for any cards sold at a loss, there is no loss deduction or carryover allowed on the sale of a collectible. Something tells me that in the case mentioned, the person would walk away with their $200K cash from the sale, and with no income tax owed on it, and that is it.

[Exhibitman]

I am not a tax attorney, I just research this stuff for my own planning and information.

All of these tax questions are both specialized and personal: do NOT take the word of some stranger on a chat board, see your own tax planner. What someone says here might not even apply to you.

Now, when it comes to fighting over your positions, that too is idiosyncratic. I can stand my ground against the tax people more than most because my cost of litigation is zero. If I had to hire an attorney I'd be much more wary of getting into a fight because the cost of fighting makes a winner into a loser.

As far as valuation goes, there is no explicit requirement that I have ever heard of for an appraisal by a specific form of appraiser, except in the charitable deductions area. Appraisals are just speculative opinions anyway. When my parents passed away, I found a series of insurance appraisals they got for various things and they were nowhere near market valuation. They were way off because they were a means of setting up a bigger insurance claim not of establishing a true market value. The tax opinions I've read on valuation disputes all basically amount to what we call a "whore fight": the IRS puts up one expert to say X, the taxpayer puts up another to say Y, and the court decides who has the better liar.

One further thing to consider: there is no need to liquidate right away. Unless there is a reason to quick sell, you can take your time and do it right.

[Fred]

Thank you for the responses. I wouldn't point blank take things I read on an internet chat board as gospel, but when it's coming from board members I feel have a clue, I'll definitely look at what was presented as probably closer to accurate, than not. There will definitely be research done on the thoughts/ideas imparted in the forum.

Somewhere in all this, I'll have to figure out if it'd be easier for me to sell it off before my ticket gets punched or try to formulate a plan for the family after they figure out the card board actually has more value to it than to make some old guy smile.

[Exhibitman]

If I don't need the money I would rather pass on the good cards to my daughter and let her take advantage of the step-up in basis (assuming it still exists) rather than my paying taxes on the gains. I do plan to liquidate the bulk/crap as I get older, mostly because I find dealing to be an enjoyable business venture and if I am lucky enough to be able to retire from law it will fill the days nicely. Plus, i can take business trips to exotic locales every August: Cleveland, Atlantic City, Rosemont, maybe even Baltimore some day. It's the stuff dreams are made of...very small dreams.

[todeen]

Originally Posted by BobC

Regardless Johnny, in times of economic instability and panic, many people often view "hard assets" as a viable alternative to the volatile marketplace. Think of people who buy gold, silver, and other precious metals as a potential hedge against that market instability. Whether any of us like it or not, there are many people that now look at cards as one of these "hard assets" that may be a viable alternative to the stock market and other investment vehicles. With the proliferation of TPG grading, AHs, online sellers/consignors, and even Ebay, cards are not such an illiquid asset as they may have been just a couple decades or so ago.

And the eventual drop in value of such "hard assets" as cards is not entirely unpredictable either. There are more than a few well known advisors out there telling people to put, and keep things, in cash for now, and leave it there until the overall market volatility factors start to play out and we can maybe get a better idea of where things are headed.

I buy silver as a hedge against an apocalyptic situation. Read it in a "preppers" book and thought it sounded reasonable. Gold will always be too expensive to use as real currency. I'm not certain my baseball cards would be considered currency/hard asset if something like a Civil War was to start and I needed to relocate in a hurry.

Sent from my SM-G9900 using Tapatalk

[Exhibitman]

Originally Posted by todeen

I buy silver as a hedge against an apocalyptic situation. Read it in a "preppers" book and thought it sounded reasonable. Gold will always be too expensive to use as real currency. I'm not certain my baseball cards would be considered currency/hard asset if something like a Civil War was to start and I needed to relocate in a hurry.

Sent from my SM-G9900 using Tapatalk

My hedge against the apocalypse is Smith & Wesson. Can't kill a zombie with a silver coin.

[G1911]

Originally Posted by todeen

I buy silver as a hedge against an apocalyptic situation. Read it in a "preppers" book and thought it sounded reasonable. Gold will always be too expensive to use as real currency. I'm not certain my baseball cards would be considered currency/hard asset if something like a Civil War was to start and I needed to relocate in a hurry.

Sent from my SM-G9900 using Tapatalk

When the apocalypse comes, I will be swapping 5.56 and 7.62 for T cards. Bring your hall of famers by my bunker. I might not survive long.

In a SHTF world where all order has collapsed, I doubt much besides food, water, medication and especially ammunition would have value. I doubt such a situation is likely, thankfully.

[Snowman]

Originally Posted by Republicaninmass

A really Nice 1954 aaron psa 8 sold in a major auction for 27k last week. Recent sales are between 40 and 75k. Less than a decade ago, it was a 7k card. Aside from his passing, what constitutes the price increase? Plenty of MOMO and FOMO investors that are going to be hurt if they need to sell. Even at 27k people are thinking twice as the only upside is if someone someday pays 50k for it!

It was $37k, not $27k (huge difference in terms of standard deviations away from the mean), and it was not a "really nice" copy. It was horribly off center for the grade. I remember seeing it and thinking, "How the hell did that get an 8?" and then thinking, "this card is going to bomb for sure".

[Leon]

Not a great looking 8.

Originally Posted by Snowman

It was $37k, not $27k (huge difference in terms of standard deviations away from the mean), and it was not a "really nice" copy. It was horribly off center for the grade. I remember seeing it and thinking, "How the hell did that get an 8?" and then thinking, "this card is going to bomb for sure".

[Yoda]

Originally Posted by Exhibitman

My hedge against the apocalypse is Smith & Wesson. Can't kill a zombie with a silver coin.

Nor with a Mantle RC.

[Republicaninmass]

Originally Posted by Snowman

It was $37k, not $27k (huge difference in terms of standard deviations away from the mean), and it was not a "really nice" copy. It was horribly off center for the grade. I remember seeing it and thinking, "How the hell did that get an 8?" and then thinking, "this card is going to bomb for sure".

This is the one that sold for 27k