The Sneaky Reason Inheriting Collectibles Is Really A Curse In Disguise

Inherited collectibles can make beneficiaries quite happy when they'd like to continue to own that collection. Other times, though, an heir might prefer to sell some or all of the inherited items — and that's when collectibles join the list of assets that can be a lot of trouble to inherit. The main problem in these situations is the tax liability involved due to capital gains tax. The amount of relevant capital gains equals the difference between what someone paid for the items and the sales price received. Because a person typically pays zero dollars on inherited goods, the entire sales price is likely to be profit.

If the heir sells the collectibles at a profit after holding them for a year or more, then that person can be subject to the maximum capital gains tax rate of 28%, which is higher than the typical 15% to 20%. If the items are sold before the one-year period is up, then the capital gains can be taxed at the person's income bracket, which could be more or less than 28%. Because the IRS is the arbiter of tax liabilities, how it defines a collectible really matters. Its definition currently includes any work of art, rug, antique, or alcoholic beverage, along with most metals, gems, stamps and coins. Though, thanks to IRC Section 408(m), the IRS has a lot of leeway to expand that list to include other forms of personal property depending on the item.

Imagine someone inherits pieces of old furniture that could be worth plenty of money. The IRS includes antiques in its list of collectibles so, if the inherited pieces of old furniture fall under that category, the beneficiary may need to pay capital gains taxes if they sell them. The IRS doesn't offer a specific antique definition, but a generally accepted principle in the vintage industry is that a collectible falls into the antique category once it's more than 100 years old. So, if someone in our example scenario inherits old furniture that's 100 years old or older, they're likely to be considered antiques.

This situation can get complicated. So, even people who normally aren't sure whether paying for professional help with taxes is worth it or not should at least reconsider hiring someone when capital gains on inherited property are involved. There are accountants who specialize in capital gains scenarios and can often recommend ways to minimize — or at least defer — this tax payment. Plus, if the IRS questions how someone has reported or paid taxes on capital gains, the accountant can professionally back them up.