Exchanging One Classic Car for Another Isn’t as Cheap as It Was

The classic car market has been buoyant over the last 15 years or so. And those collectors who bought cars during the Great Recession-induced market dip probably have some handsomely appreciated assets in their garages.

But car connoisseurs looking to trade up have now lost a valuable tax benefit, and the top end of the market may be feeling a pinch as a result.

Collectors who were tempted to trade up to a rarer, prettier and pricier car used to be able to take advantage of a provision of the Internal Revenue Code allowing them to defer the tax on their original car’s appreciation.

The provision — the 1031 like-kind exchange — was prized by art collectors and became almost as common in the car aficionado’s lexicon as wire wheels and big-block engines. But a change in the tax code in last year’s overhaul put the brakes on the merry-go-round of up-trading.

“It really has taken some great cars out of the market,” said Mark Hyman, a classic-car dealer in St. Louis. “Very valuable cars that have been in the same hands for a lot of years aren’t being offered for sale because the owner’s basis is low and he or she doesn’t want to pay the tax.”

This month, the collector-car world will gather in Monterey, California, where the Pebble Beach Concours d’Elégance promises to showcase the finest vehicles on the planet. No fewer than six high-end auctions will take place the week before the event opens on Aug. 26.

Those sales will provide an opportunity to gauge the collector-car market.

Previously, those seeking an upgrade had 180 days after selling their vehicle to buy a new one if they used the services of an exchange accommodator, who held the sale proceeds in escrow, said John Draneas, a lawyer in Portland, Oregon, who specializes in tax and estate planning for car collectors. The cycle of trading up and deferring the gain could go on almost indefinitely until the day of reckoning when the collector or his estate finally cashed out, at which point the deferred taxes would be due.

With the change in the tax code, those who offload a collector car must pay capital gains taxes on its appreciation, regardless of whether they buy another vintage car to replace it.

“Now, since you have to immediately pay taxes on the gain, about one-third of the sale proceeds of the car goes away,” Draneas said. “Without the full proceeds to reinvest, many collectors simply can’t afford the cars that they might otherwise have wanted to trade up to.”

Colin Comer, a collector and dealer in Milwaukee, said deals used to be made when one collector essentially named the car that would act as the substitute property.

“Now those deals aren’t happening,” he said. “It hasn’t really affected values much yet, but it certainly has affected the frequency of trading.”

Auction data indicates the effect is real.

The percentage of $1 million-plus cars that meet their reserve at auctions in the United States has fallen about 9 points since 2017, to 61 percent, according to Brian Rabold, vice president of valuation for the classic-car insurer Hagerty. But in the European Union, where the tax laws have not changed significantly, sell-through rates for such cars are up about 10 percentage points.

If the change in the tax code has injected some uncertainty into the collector car market in the United States, another potential policy change could throw a bigger wrench into the works.

The chances that President Donald Trump could enact heavy tariffs on imported vehicles and auto parts have diminished since something of a trade truce was reached last month with the European Union. But the possibility worried Hyman enough that he offered his comments on the idea to the Commerce Department. Foreign-built vintage cars are “international currencies” that cross borders with relative ease, and higher tariffs would endanger that market, he said.

David Gooding, founder of Gooding and Co., which will present an auction at Pebble Beach starting on Aug. 22, took perhaps a more skeptical view of the long-term implications of tax changes and shifting trade policy.

The global collector car market, he said, had weathered a lot in recent years: a presidential election, speculation about the European Union after Britain’s decision to leave the bloc, and the changes in the tax code. It has proved resilient, he said.

“Even the generational shift that is taking place hasn’t really affected the strength of the market,” Gooding said. “As long-term owners finally part with their cars, interesting, best-of-category and really special cars are finding younger buyers regardless of outside concerns.”