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. 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.