John called you late on Friday afternoon with a simple question. He is consideri

Question

John called you late on Friday afternoon with a simple question. He is considering selling an old a car and wants to know what the tax implications will be. He gives you the following facts. He purchased an old car from a junk yard 20 years ago for $1,000 and has been restoring it. His hobby is fixing old cars. He has put $20,000 into restoring the car and it is now in mint condition. He displays it proudly at local car shows. Last weekend an individual at a car show offered to buy it. John said he was very proud of his work and believes it to be worth $35,000. Jokingly, he offered to sell it for $950,000. The other individual accepted the offer. John now is concerned what the tax implications will be if he accepts the offer and has asked for your advice. tax implication country is U.S. He asked the following questions:

What is the amount of the gain he would recognize if he sold it?

How much tax would he pay if he received the entire $950,000 in 2014?

Can you recommend any ways to minimize or defer the tax?

What do you recommend?

Research the issues related to the sale of the car and formulate an opinion. If there is additional information needed, list it.

Explanation / Answer

Purchase price of the Car                 = $1000

+ Restoring cost                                = $20000    

Thus total cost of Car                        = $21,000

Now Car is sold for   $ 9,50,000 .

(1) Amount of the gain he would recognize if he sold it = ($9,50,000 – $21000) = $9,29,000

(2) Amount of tax John would pay if he received the entire $950,000 in 2014 = $929000 x 28 / 100 = $2,60,120.

(3) However, let's look at an alternative approach that might make this transaction even more favorable for the seller. Prior to the auction, John transfer his old car to a Flip Charitable Remainder Unitrust (Flip-CRUT).

A Flip-CRUT is a special type of charitable trust that allows non-income producing assets to be placed in trust and then following a "triggering event" defined in the trust document (in this case, after the car is sold), the trust “flips” to a Standard Charitable Remainder Unitrust (SCRUT) and begins distributing income normally to the John who established it.

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