The "Art" of Tax Law: Three Art Law Tax Strategies (2024)

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• Alexandra Rozzi
• July 29, 2024

Beauty is in the eye of the beholder. If you have an eye for art, you may also need deep pockets when it comes to the potential tax consequences of offloading a valuable masterpiece, sizable collection, or even an NFT. Check out these top strategies to minimize your tax burden when it comes to selling or transferring art.

Art Law Strategy #1: Qualify as an Art Investor

Perhaps your large art collection has grown too large, you’re downsizing your home, or your taste in art has simply changed. Selling your art triggers a tax consequence, especially if it has gained value over a lengthy period of time.

How much tax are we talking about? Let’s say you purchased a painting from an up-and-coming artist in 1970 for $1,000, now worth $50,000. The difference, $49,000, is taxable by the IRS as a long-term capital gains tax of up to 28% and an investment tax of 3.8%.

If you’re looking to gain a profit, there isn’t much you can do to avoid taxes when selling. One opportunity is to qualify as an art investor and sell it (and other art or collectibles). As an art investor, you may at least qualify for certain expense-related deductions; however, the IRS would still view the profits from the sale as capital gains and tax accordingly. To qualify as an art investor, the IRS determines the purpose behind art ownership. In short, if you hold art to make a profit, then you may qualify as an art investor.

Art Law Strategy #2: Create a Private Foundation or Donate to a Qualified Nonprofit

Perhaps you’re not looking to sell your art collection but rather donate it to an art institution or even loan it out for a timely art exhibit. In this case, your art may be best handled as a transfer into a private foundation you establish. Foundations are 501c(3) organizations and enjoy many tax benefits.

Art donated to a private foundation avoids federal income tax and gift tax. Donating to a qualified charitable nonprofit organization such as a private foundation allows you to deduct the art’s fair market value and have no recognized capital gain. An important item to note is that there are rules related to using the donated art.

Whether you’re creating your own private foundation or donating your art to an existing qualified nonprofit organization, both options allow you to preserve your art in a meaningful way and benefit yourself and a charitable organization.

Art Law Strategy #3: Add it to Your Estate Plan

Perhaps you have a family member who wants to inherit your collection, or you want it to be donated upon your death. Work with an estate attorney to have your artwork bequeathed accordingly, keeping tax benefits in mind and ensuring a nonprofit is properly qualified. Understanding now how your art will be taxed will enable you to properly and beneficially structure your estate plan to maximize a profit or donation by minimizing a negative tax treatment.

When you pass, your artwork receives a step-up in tax basis, meaning it can be valued based on what it’s worth now versus when you bought it, reducing high capital gains tax upon a future sale. Using the example from above, say the painting is sold after passing through your estate. The painting is now worth $50,000 – the tax basis – and the amount paid for the painting is $50,000. The difference, $0, results in a tax-free sale of the painting!

Tax law is an art

For as much thought is put into curating a sizable collection of art or procuring a valuable piece, be it a painting, sculpture, or even a cat meme (yes, this is a thing), just as much thought should be invested in how to properly transfer it in order to preserve your legacy and avoid significant tax consequences.

Working with financial and legal advisors can help you decide the right strategies, notably for selling, donating, or transferring while you’re alive or after your death, taking into consideration your overall wealth, possible business opportunities, and lasting vision for your works of art.

Reprinted with permission from the Summer 2024 Edition of Network Magazine © 2024 All rights reserved. Further duplication without permission is prohibited.