Part I · Asset Classes · No. 04

Classic and exotic cars

A pre-war Bugatti and a current-year Ferrari trade in entirely different markets but share the same federal-tax architecture: capital asset on disposition, sales and use tax at acquisition, and a long-running debate over whether the collectibles rate applies.

The asset class in tax terms

A collector automobile held for personal pleasure is a personal-use asset. Loss on sale is non-deductible under §165(c); gain is capital. A car held for investment may qualify under §212 for deduction of holding expenses, though the standard is exacting. A car held in a dealer trade or business is inventory.

The collectibles question is the principal unresolved point. §408(m)(2) does not expressly include automobiles among the listed collectibles categories. The IRS has not issued published guidance designating collector cars as collectibles under the Secretary's §408(m)(2)(F) authority. Many practitioners therefore report long-term gain at the regular capital-gains rates (top rate 20%) rather than at the 28% collectibles rate, while recognizing that a car could be argued to fall within the "work of art" or "antique" categories. The unsettled position is a meaningful planning variable for high-appreciation transactions.

Acquisition

State sales tax on vehicle acquisition is collected at registration. Combined rates of roughly 6% to 10% are typical. The Montana-LLC technique — registering a high-value vehicle to a Montana LLC, exploiting Montana's absence of a general sales tax — has been a recurring planning move. It does not remove the buyer's home-state use-tax liability where the vehicle is actually kept and driven there; states including California have pursued use-tax and registration claims against residents using Montana-LLC-registered vehicles at home.

Customs duty: the general (MFN) rate is 2.5% for passenger automobiles under HTS 8703 and 25% for light trucks under HTS 8704. Since 2025, imported passenger vehicles have also been subject to additional Section 232 national-security tariffs (with country-specific arrangements, e.g. for EU, Japanese and UK vehicles); the IEEPA tariffs struck down in Learning Resources, Inc. v. Trump (U.S. Feb. 20, 2026) did not include the Section 232 auto duties. Tariff treatment is changing frequently — confirm current CBP guidance at the date of import (position as of October 2026). Importation of older vehicles requires NHTSA and EPA compliance — NHTSA's 25-year exemption from the federal motor-vehicle safety standards, EPA's separate exemption for vehicles at least 21 years old in original configuration, and NHTSA's show-or-display exemption for certain rare vehicles. Compliance failures produce seizure exposure beyond duty issues.

Holding and operation

Annual costs: registration, insurance, storage, maintenance. None deductible for a personal-use vehicle. For a §212 investment holding, the standard for deduction is high; the IRS reads the §212 "for the production of income" requirement strictly for tangible personal property that produces no current income. Wrightsman v. United States, 428 F.2d 1316 (Ct. Cl. 1970), which denied §212 deductions for an art collection held primarily for personal enjoyment, illustrates the standard.

Depreciation under §168 is generally not available for personal-use or investment-held collector cars; the cars are not used in a trade or business. A dealer's inventory is not depreciable (inventory is COGS-charged, not depreciated). A vintage-car racing operation conducted as a trade or business may produce depreciable property — and is a fertile ground for §183 hobby-loss disputes.

Income from the asset

Most collector cars produce no direct income. Show appearance fees, rental for film and television production, and event hire are occasional revenue lines; ordinary income to the owner. Vintage-car racing prize money is gross income; expense deductibility depends on whether the racing is a trade or business under §162 or a hobby under §183.

Disposition

Long-term gain is taxed at up to 20% (assuming non-collectible characterization) plus 3.8% NIIT plus state. Short-term gain is ordinary. Like-kind exchange under §1031 is no longer available after the 2017 amendment. Installment sale under §453 is available, with character preserved on each payment.

Disposition through a charitable-remainder trust is an option for highly appreciated collectible vehicles, similar to art mechanics.

Gift and estate

Fair-market-value inclusion at death with §1014 step-up. Lifetime gift triggers carryover basis under §1015. Charitable contribution to a museum that will exhibit the car (a related use) may qualify for an FMV deduction; tangible personal property put to an unrelated use is limited to the lesser of basis or FMV under §170(e)(1)(B). For donated vehicles claimed at more than $500, §170(f)(12) requires a contemporaneous Form 1098-C acknowledgment, and if the charity sells the vehicle without significant intervening use or material improvement the deduction is capped at the gross sale proceeds.

Common structures

• Personal ownership. The default for personal-use vehicles.
• Single-member LLC. Liability protection; preserves disregarded-entity status for tax.
• Montana titling LLC. No-sales-tax registration; aggressive enforcement in user-state. See Montana.
• Family limited partnership. Hold the collection; gift interests with discounts; estate-tax planning.
• Charitable-remainder trust. Appreciated-collection liquidity with deferred tax.
• Operating racing business. A genuine racing trade or business with material owner participation, depreciation on race cars, and §162 ordinary-and-necessary expense deduction.

Audit and enforcement landscape

The IRS audits high-value vehicle deductions and §183 hobby-loss positions on racing operations. The nine-factor test of Treas. Reg. §1.183-2(b) — manner of operation, expertise, time and effort, expectation of asset appreciation, history of losses, prior success, financial status of taxpayer, elements of personal pleasure — applies. Multi-year losses on racing or restoration operations are recurring audit targets.

State revenue and motor-vehicle authorities pursue residents who register vehicles through Montana LLCs but garage and drive them at home, using registration, insurance and residency evidence; several states have brought civil and, in some cases, criminal actions over the practice.

If the collectibles-rate question is raised, the argument is more likely to turn on the "work of art" or "antique" categories than on the metal-or-gem category; there is no published authority applying either to a collector car.

Jurisdictional notes

• Montana. No state sales or use tax; LLC titling pattern.
• Delaware. Holding LLC; no general sales tax, although Delaware charges a motor-vehicle document fee on titling.
• Florida. Buyer-friendly registration; significant private-collector market.
• United Kingdom. Private passenger cars are exempt from capital gains tax under s.263 TCGA 1992 (including classic cars); the exemption does not extend to vehicles of a type not commonly used as private vehicles and unsuitable for such use (e.g. single-seat racing cars).
• Italy. Superbollo annual surcharge (EUR 20 per kW above 185 kW, reduced as the car ages and not due after 20 years); significant for high-output exotics.

Reviewed October 2026