Tags: Art | Sales | Donations | Taxing

Art Sales and Donations Can Be Taxing

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Monday, 22 Sep 2014 09:58 AM Current | Bio | Archive

Laws determine what kind of sale, gift, or donation produces a profit and what type of taxes must be paid.
 
Considered "collectibles," collectors must pay capital gains taxes on art sale profits of 28 percent on schedule D and pay state tax. If the IRS does not identify a taxpayer as “a dealer,” art sale profits should not be on tax form schedule C, nor can income from a sale be used as a retirement plan deduction to lower capital gains taxes. 
 
Investors (not collectors) usually can tax deduct all provable expenses incurred while making an art purchase or sale for profit. Losses can be deducted if an investor is able to prove a transaction was entered into for a profit gain, but no personal expense deductions are allowed. In order to get this deduction, an investor has to prove a purchase was made and art was held for the primary or sole reason of an investment. That often is hard to prove!
 
A collection of art may or may not be identified as investment art by the IRS. A person can claim an art collection is an investment if the person has told others that fact and if it can be substantiated the art was held for several years as a hedge against inflation.
 
To be identified by the IRS as an art investor, one must be able to show considerable time was spent collecting and consulting with art experts regarding purchases and sales. The investor should be able to certify he or she has read and understands art publications and investment strategies and has made efforts to exhibit purchased art, or has attempted to get the art illustrated in books and articles in order to enhance its value.
 
It is important an investor keep thorough, accurate files that have proof of purchases with bills of sale, copies of authentication certificates, appraisals, and conservation reports and data regarding provenance, exhibitions, literary references, and conservation reports (if any). When questions are raised, the IRS and courts look at motive as the ultimate aspect of collecting for investment.
 
Be aware of tricky tax laws.A collection that is not sold or that gives a person pleasure does not exclude the collection from being held for investment. Some substantiated art-related expenses can be deducted on tax returns, if the art has been held for the production of income, but those same deductions are not valid for mere collecting activities.
 
Businesslike record keeping, accurate accounting, extensive art book libraries and subscriptions to art magazines usually indicate to authorities an investor purchased art in a profit motivation mode.
 
People commonly swap art, hoping to “trade up.” Some dealers want to get rid of certain artworks and are eager to trade with a retail client for merchandise other clients have not seen. Trading allows both the retail client and the dealer to barter and exchange without having to produce huge sums of money.
 
An investor can avoid paying capital gains tax on a “like-kind” trade, but those who cannot prove swapped art was exchanged for an investment are required to pay capital gains tax when a gain is made. A painting swap for one of lesser value (a “trade down”) is either a short or long-term capital loss. 
 
Many collector-investors use art to trade for other commodities. Make certain anyone with whom you make a trade is legitimate and will stand behind authenticity, condition, and documentation and that art evaluations are proper and not inflated.
 
If estate planning for eventual death is a person’s primary concern, keep thorough records of art transactions and state in documentations who owns valuable assets.
 
If a husband and wife jointly own fine art, their names and social security numbers should be written and placed in a vault, along with the artist’s name, the artwork’s title, medium, and size. A wise estate planner will have up-to-date appraisals and proper insurance coverage for costly items. Only the names of owners should appear on an appraisal or a fine arts insurance policy or floater. When a collector-investor dies, art and antiquities are considered estate assets and their value is based on appraisals created within 60 days of a person’s death.
 
If an art collection is inherited and it is immediately sold for less than the estate appraisal evaluation, it can be deducted as a capital loss if the art was not first converted to personal use and then sold. In other words, the estate (not an heir) has to make the sale at fair market value and the money from any sale remains an estate asset. However, if the deceased bequest art to Jane and she took possession of it, and Jane decided to sell the art at a loss and keep the money, the art was converted to personal use and Jane cannot claim a loss.
 
The IRS requires all art donations be accompanied by a certified appraiser’s evaluation. The IRS defines “fair market value” for estate, gift, and income taxes as “the price at which the property would change hands” between a willing buyer and seller. Contested evaluations go before the IRS’s Art Advisory Panel to resolve the relevance or lack thereof of fair market values listed in appraisals. Audits and investigations by IRS panels occur when tax-related gifts and donations have appraisal evaluations of over $20,000. Contests usually are settled out of court to save time, effort, and money. 
 
If an estate or heir gives overvalued property to a charity, it can result in a sizable tax penalty and jail time. Before making a charitable gift, go over the laws pertaining to it with a financial adviser and lawyer. (For extensive legal tips, contract examples and tax forms about these matters see Lerner and Bresler’s "Art Law," ISBN 0-887224-108-4.)
 
The IRS won’t allow anyone to invest in artwork (or collectibles) for inclusion in an IRA (or self-directed retirement plan).
 
Federal and state tax laws regarding capital gains taxes, estate planning, IRAs, rollovers, and inheritance are exceedingly convoluted. Owning art can benefit the living and the dead if purchased, maintained, and bequest properly.
 
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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PatriciaPierce
Laws determine what kind of sale, gift, or donation produces a profit and what type of taxes must be paid.
Art, Sales, Donations, Taxing
1092
2014-58-22
Monday, 22 Sep 2014 09:58 AM
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