The Sneaky Reason Inheriting Collectibles Is Really A Curse In Disguise

Inherited collectibles can make beneficiaries quite happy, especially when they'd like to continue to own that specific item or collection. However, other times an heir might prefer to sell some or all of these inherited items — and that's when collectibles can join the list of assets that can be a pain to inherit. The main concern in these situations is the tax liability that can be incurred by capital gains on the inherited items. Capital gains usually equal the difference between an item's value when someone acquires it and the price at which that person ultimately sells it. However, these regulations are a bit more nuanced when inherited property is involved.

When someone dies, the items in their estate are legally assigned a fair market value — known as a price basis — dating to the day their owner died. This basis usually needs to be determined by a professional appraiser and, depending on how niche an item is, can be an arduous and confusing process. Should a beneficiary then decide to sell an inherited collectible, they would be required to pay taxes on any money they make on the sale that exceeds the item's assessed basis. 

As for the tax liability itself, profits made on inherited property are taxed as long-term capital gains — even if the beneficiary holds the item for less than a year. The maximum capital gains tax rate for collectibles is 28%, which is considerably higher than the 0% to 20% rates applied to other asset types, further underscoring how important it can be to ensure a proper price basis assessment. 

The IRS is the arbiter of tax liabilities, and defines collectibles as any piece of art, rug, antique, or alcoholic beverage, along with most metals, gems, stamps and coins. However, 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 old furniture that could be worth a lot of money. The fair market value for each piece would generally need to be determined as of the decedent's death date. However, estate executors can instead elect to establish the fair market value six months after the decedent's passing — something that could potentially lower capital gains if the item increased in value in that time. Once the value is determined, the beneficiary needs to subtract that figure from whatever price they ultimately get for the item in order to determine their capital gains liability.

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.