Plan Carefully for Art Investment

Friday, 13 Jun 2014 04:03 PM

By Patricia Pierce

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An art investor reviews, evaluates, and reworks details pertaining to investments, keeps careful watch over the art market, is aware of developing cultural and economic changes, and is able to hold assets if a disaster causes the financial markets to come to a standstill.
 
Investors stay within the framework of established capital objectives and are aware of tax consequences that could alter their goals for buying, selling, holding or donating a commodity. Some people purchase art as a hedge against retirement years, when a lower yearly income might be derived from tax-free bonds, stock dividends and IRAs.
 
They realize the longer they hold great art, it usually becomes more rare and climbs in value. Once retired, they no longer depend on hefty salaries to pay for lifestyles, so they carefully sell art, pay capital gains taxes and live off the balance. This is a wise art investment strategy. As fine art rises in value, investors pay no tax on the value-increase until the asset is sold. 
 
Most high-end art investors earn an annual income of over $500,000 and (if they do not plan properly) pay up to 53 percent in various taxes. Only $3,000 worth of net asset losses can be used yearly to offset ordinary income. Thus, investors strategize how to use larger losses (like selling an art purchase mistake) to their best advantage. 
 
Short-Term Collectible Capital Gains Tax Rates: Collectibles held less than one year are taxed at personal income tax rates, just like short-term capital gains taxes on stocks or bonds.  
 
Long-Term Collectible Capital Gains Tax Rates: Art and collectibles held one year or longer are taxed at 28 percent. Thus, if you bought a Van Gogh for $100,000 in 1980 and sell it for $20,000,000 in 2014, you would owe $5,572,000 in capital gains taxes.
 
Investors often sell commodities for short and long-term capital losses to offset short and long-term capital gains to reduce taxes. For instance, an investor sells at a loss 5,000 shares of a certain stock purchased two years ago and sells a painting he has owned for over two years for twice the initial investment. The stock loss offsets the profit from the sale of the painting and reduces how much long-term capital gains tax is owed.  
 
To tax plan effectively, keep records of the cost basis for art. Art’s initial investment, commissions, exhibition costs, appraisals and authentication fees, and shipping and handling expenditures can be deducted from sale proceeds.
 
In order to enjoy collecting and to avoid buying and selling errors, astute collector-investors are conversant about art history, artistic techniques and stylistic tendencies. They can identify a painting’s overall condition and distinguish a genuine artwork from a replica, counterfeit or lesser example.
 
They understand what to collect, when and where to buy, and are sensitive to the personalities and characteristics of others that signal something is wrong or suspicious when an art transaction is taking place. They are able to pay for the art they desire and are comfortable, confident and able to purchase it, when it is offered at or below market value.
 
If an investor does not have the time to learn how to distinguish a fine painting from an inferior one, or the genuine from the counterfeit, successful deals can be made with a reputable art dealer or adviser who does. Those who lack wisdom, information and scholarship make the worst art investments if they buy impulsively or without expert guidance.
 
Have a well-thought-out strategy about how and when to buy, sell, hold or donate valuable assets. Long-term investment planning usually is a smart, safe way to insure strong profits from the sale of art and fine antiquities.
 
Some art investors buy lesser-priced pictures that momentarily are popular or trendy, trying for an inverted yield curve. In this risky scenario, the investor hopes short-term art purchases will produce more revenue than long-term yields. This kind of risky buying is tricky and it takes a sharp art connoisseur to understand when to buy and sell. 
 
Beware a glitzy promotion’s gimmickry. Unless an unknown artist’s start-up promotion has been sprinkled with pixie dust, money often is spent to veil crap as grand. Impressive-looking exhibitions, lavish cocktail parties, brochures and expensive ad campaigns tend to entice naïve buyers and make fortunes for promoters. Many relatively unknown artists often are not talented, their work has no secondary market and it usually cannot be resold at cost. Buyer beware!
 
Patricia Jobe Pierce is a freelance writer, art historian, art dealer-consultant, certified AAA appraiser, public speaker, photographer and American art authenticator for museums, auction houses and collectors. She graduated from Boston University with a BFA in 1965, is owner and director of Pierce Galleries, Inc. in Nantucket and Hingham, Mass., and is author of many works, including, "Art Collecting & Investing: The Inner Workings and the Underbelly of the Art World." For more of her submissions, Click Here Now.
 
 
 
 

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