Latest / The High Net Worth Podcast with Fexingo: Wealth Management, Tax Strategy, and Affluent Finance / How the Ultra-Wealthy Use Collectible Cars as Tax-Smart Assets
Transcript
- Lucas: So there's a car in a climate-controlled garage somewhere in Connecticut that cost its owner forty-eight point four million dollars. And the IRS considers it a tax shelter. Luna: Is this the Ferrari 250 GTO that sold at auction a couple of years ago? Lucas: Exactly. 1962 Ferrari 250 GTO — one of thirty-six ever built. Sold privately in 2023 for forty-eight point four million. Now, the buyer didn't just buy a car. They bought a tax-advantaged asset. Luna: Walk me through that. How does a vintage sports car become a tax strategy? Lucas: Two mechanisms. First, Section 1031 of the tax code — the like-kind exchange. If you sell a piece of investment real estate and roll the proceeds into another property within a hundred eighty days, you defer capital gains. Turns out, the IRS has ruled that certain collectible cars can qualify as 'like-kind' if they're held for investment purposes. Luna: Wait — you can swap an apartment building for a Ferrari and defer tax? Lucas: Not any Ferrari. The car has to be held for investment, not personal use. And it has to be exchanged for another car of the same 'nature or character.' So think: one rare collector Ferrari swapped for another. Not a daily driver. But yes — wealthy collectors have been doing this for years. The 250 GTO buyer almost certainly used a like-kind exchange to defer gains from another asset. Luna: That's wild. And the second mechanism? Lucas: Step-up in basis at death. If you hold the car until you die, your heirs inherit it at its fair market value on your date of death. All the capital gains — the difference between what you paid and what it's worth — vanish. The IRS forgives them. So a car bought for fifty million can pass to kids tax-free. Luna: So effectively, the government subsidizes holding onto Ferraris for decades. What's that doing to the market? Lucas: It's driving institutional-grade demand. According to a 2025 Deloitte report, ultra-high-net-worth families now hold an estimated twelve billion dollars in collectible cars globally. That's up from about seven billion in 2020. And a growing share is held through family offices, not just individual enthusiasts. Luna: But isn't there a risk the IRS cracks down? I mean, using a tax code meant for real estate to swap Ferraris feels aggressive. Lucas: It is aggressive — but it's legal. The IRS has issued private letter rulings confirming that certain collector cars can qualify. The key is the car must be held for investment, and the exchange must be properly structured through a qualified intermediary. You can't just sell a Ferrari and buy another one with the cash. The intermediary has to hold the proceeds. Luna: And if you mess up the timing? Lucas: You lose the deferral. The ninety-day identification period and the hundred-eighty-day closing window are strict. Miss them, and you owe capital gains tax immediately. That's why wealthy families hire specialized advisors — some firms now have 'collectible car tax' practices. Luna: Before we go further — and I'm saying this because we genuinely don't run ads — if these kinds of money conversations have helped you think about your own finances differently, it really does make a difference when listeners support the show. A couple of dollars a month at buy me a coffee dot com slash fexingo keeps us independent. It's how we stay ad-free. Lucas: Yeah, and it's not about perks — it's just that podcasting has real costs, and listener support is what lets us do deep dives like this rather than chasing trending topics. So if that matters to you, the link is buy me a coffee dot com slash fexingo. And now back to Ferraris. Luna: So how do you prove to the IRS that a car is held for investment and not for joyriding? Lucas: Documentation is everything. You need a formal investment plan, limited miles driven per year — usually under a thousand — and you can't take it to car shows for fun. Some collectors store cars in bonded warehouses where they're never driven at all. They're essentially art pieces on wheels. Luna: That feels like a shame. These are machines built to be driven. Lucas: It is. But the tax tail wags the dog. If you drive a fifty-million-dollar Ferrari even a few hundred miles a year, the IRS could argue it's personal-use property and disqualify the 1031 exchange. So many of these cars sit in museum-like storage, accumulating value and nothing else. Luna: What about the cost of that storage? Climate control, security, insurance — that's not cheap. Lucas: It's significant. Insurance alone can run one to two percent of the car's value annually. On a forty-eight-million-dollar car, that's up to a million a year. Storage in a high-security facility might be another hundred thousand. But for someone in the top tax bracket, the capital gains deferral and step-up more than offset the carrying costs over a multi-decade hold. Luna: So is this only for the ultra-wealthy, or can a regular investor get in? Lucas: There are funds now. A few firms have launched collectible car funds that let accredited investors buy shares in a portfolio of Ferraris, Porsches, and Aston Martins. Minimums are typically a hundred thousand dollars or so. But the tax benefits flow to the fund, not the individual investor — you'd still owe capital gains when you sell your shares. Luna: So you're better off buying the car directly if you can afford it? Lucas: If you have the capital and the holding period, yes. The direct ownership allows the 1031 exchange and the step-up. A fund shares the risk but also shares the tax treatment — you lose the individual deferral. Luna: And the market itself? Is this bubble territory? Lucas: It's frothy. The Ferrari 250 GTOs have appreciated about fifteen percent annually over the past decade. But there's a concentration risk: the top one percent of cars by value account for most of the market's gains. Lesser collector cars have underperformed. And liquidity is thin — if you need to sell quickly, you might take a thirty percent haircut. Luna: So it's not a casual investment. You need a long time horizon and a high risk tolerance. Lucas: Exactly. It's a passion asset with tax advantages. You shouldn't buy a Ferrari 250 GTO because you want to beat the stock market. You buy it because you love cars and you want to defer taxes. The return is a bonus. Luna: What about the authentication issue? We've seen scandals with fake Ferraris. Lucas: Huge problem. There's a famous case from 2022 where a '1963 Ferrari 250 GTO' turned out to be a replica built on a different chassis. The buyer lost millions. That's why serious collectors now use third-party authentication services like Ferrari Classiche — they verify the car's provenance, engine numbers, and even the original paint. Luna: And what's the IRS's stance if you get a fake? Can you still claim the tax benefits? Lucas: No. If the car isn't authentic, its value collapses, and the IRS could argue the entire transaction lacks economic substance. You'd lose the deferral and potentially face penalties. So due diligence is critical. Luna: So the takeaway: collectible cars can be a legitimate tax strategy, but only if you treat them like the serious assets they are — proper documentation, professional storage, third-party authentication, and a long hold. Lucas: Right. And for most people, it's not the right move. But for a family office with fifty million to allocate, a classic Ferrari that appreciates and defers tax is a compelling piece of the portfolio. Luna: I wonder — as wealth inequality grows, do these tax loopholes get closed? Lucas: There's bipartisan chatter about limiting 1031 exchanges to real estate only. But so far, the collector car lobby has been effective. The classic car community is small but well-connected and well-funded. I'd watch for changes in the next tax bill, though. Luna: And until then, the Ferraris stay in the garage — appreciating and untaxed. Lucas: Exactly. It's a beautiful intersection of passion and planning. Just don't forget the qualified intermediary.