It’s easy to fall in love with a car – exotic, classic or otherwise exceptional. But how do you know it’s right for your collection, and what’s the best way to go about purchasing it?

A series of thoughtful and strategic steps, from acquisition to ownership to disposition, can ensure you’re adding a valuable asset to your balance sheet. Your car collection deserves the same level of sophisticated planning and attention as your traditional investments. In particular, the way you fund your purchases can have a meaningful impact on your financial flexibility, liquidity and taxes.

Acquisition: Making a smart collector car purchase

First, consider the car’s origin. Does it have historical or cultural significance? Perhaps it set a Nürburgring record for its era during production testing or claimed the top prize at Le Mans.

Next, perform due diligence to assess the car’s market value, which can be determined by factors such as production year, color, origin, the uniqueness of its parts or paint, market conditions and where and how it’s being sold. Engage reputable professionals and study recent auction values and private sales data to help you determine an accurate value. You should also secure maintenance records and restoration history, and obtain a pre-purchase inspection (PPI) so you can be confident your vehicle is delivered as advertised.

Finally, weigh your financing options, keeping in mind liquidity needs and tax considerations. While it might be possible to make a quick purchase by paying cash out of pocket, or selling equities, this may not be the best solution for your plan since it can use up liquidity you may need in the future or trigger capital gains. Traditional financing options may be a solution; however, ultra-high-net-worth auto enthusiasts and collectors should consider other lending strategies to optimize their purchase.

Financing solutions: Unlocking liquidity and flexibility for your auto

Securities-based line of credit (SBL)

A securities-based line of credit can offer flexible funding of high-dollar acquisitions by allowing you to borrow against your eligible securities, such as stocks, bonds and mutual funds. An SBL offers immediate liquidity, enabling you to transact as a cash buyer without having to sell out of your investments, thus avoiding capital gains recognition. Traditional auto loans require the financer to hold title to the vehicle. With an SBL, you as the purchaser hold title.

Setting up an SBL is easy with a straightforward application your J.P. Morgan advisor can initiate for you. There is no credit check, financial disclosure or fees required, and you have the flexibility to make interest only or interest and principal payments. Keep in mind that the SBL is secured by your investment portfolio and any drop in the value of the portfolio could trigger a margin call. The best way to protect against a potential margin call is to actively monitor your portfolio and ensure there is enough of a buffer to withstand some market volatility.

Automobile collection financing

Car enthusiasts looking to expand their collection may be interested in customized lending solutions, where you can fund purchases by leveraging the value of your existing collection. This approach ensures you aren’t compromising your current financial situation by liquidating investments or other treasured assets, or disrupting progress toward your long-term financial goals.

In today’s market, there are few options for securing meaningful credit against an auto collection. Most specialty lenders are small, focus on individual vehicles rather than the collection as a whole and often offer pricing that doesn’t reflect the financial strength and profile of the borrower.

Financing options include lines of credit with maturities of up to three years and interest-only loans with principal due at maturity. Eligible collections will have a minimum of five vehicles with an appraised value of at least $750,000 each. The vehicles can remain in your possession or at a secured storage facility in the United States or Canada. A title lien and insurance provided by a verified insurer are required, with your lender named as loss-payee on the policy, as required.

Opportunity cost: Why financing your collector car may make sense

Using cash or selling investments may feel like the obvious choices, but are they the best for your overall wealth plan? Tying up liquidity in a car collection may limit your ability to seize other investment or business opportunities, while selling investments to raise funds can trigger capital gains taxes and hinder future portfolio growth. Borrowing against assets, whether your investment portfolio or your auto collection, allows you to stay invested or defer gains, potentially growing your wealth while feeding your passion.

Tax-aware borrowing: Turning passion into financial advantage

While vehicles, even collector cars, are treated as personal use property, there may be instances where a collection is characterized as a business asset. Collectors who engage in business activities such as promotional use, film/photography rentals and experience rentals, among other things, may be able to deduct the interest paid on the loan as a business expense. To successfully claim the interest deduction, the collection must be held with a profit motive, and you should document any personal, non-business use of the collection.

Successful execution of tax-planning strategies requires working closely with your tax professional and wealth advisor to ensure compliance. If done with precision and care, it can turn your passion for cars into a powerful financial tool.

Custodianship: Protecting and enjoying your collection of engineering masterpieces

Once you take ownership of your car, it’s time to plan for how you will effectively own, maintain, protect and enjoy it.

• Title: Decide who owns the car. For many collectors, a single member limited liability company (LLC) per collection or per high-value vehicle may be worth considering. LLCs can shield identities, protect personal assets and facilitate gifting or estate planning. If the LLC holds title, the registration and insurance information should also reflect the LLC as the owner.
• Situs:¹ The situs of the vehicle should match where the car is primarily stored, where it is insured and where it is serviced. States are aggressively enforcing use tax and registration rules, and red flags may arise if you have a situs that is different from where the vehicle is physically housed.
• Insurance: Consult specialty insurers with experience in rare and collectible cars. Understand how you will be reimbursed in the event of a loss – agreed value, actual cash value or replacement value.
• Use: Decide whether your car will be driven (“value in use”) or kept as an investment (“value in place”). Each approach has distinct insurance and transportation needs.
• Securing and maintaining: Invest in security systems, climate-controlled storage and skilled mechanics. A vehicle that starts up and can be driven is generally more valuable than one that cannot.

Planning for the future of your collection

Your car collection is part of your legacy and estate, and it’s important to consider what you want to happen to your collection at your passing. Do you want the collection to stay intact and in the care of a loved one, a private foundation or a museum? Perhaps you prefer that certain family members receive individual cars after you’re gone? Or maybe you’d like the collection to be sold, and the proceeds donated or used to fulfill other financial goals outlined in your estate plan?

You have options. Discuss your desires with a trusts and estates attorney, who can help devise a formal plan of action for communicating your intentions.

The bottom line

Some of the fun of owning great cars is managing your collection to make sure you get the most out of it. J.P. Morgan provides customized financing that complements your current financial situation and helps you reach your goals – while maintaining your collection of investment-quality automobiles.

Ready to take the next step? Contact your J.P. Morgan advisor to explore tailored solutions and start a conversation about your collection’s future.