Art Taxation

Practical tax information and advice for artists and art collectors.

What is the Potential Impact of the Trump Tax Plan on the Art Market?

Trump Tax Plan on the Art Market

Source: YouTube

Revised Trump Tax Plan

Since May, there have been many adjustments that have been made to foreign and domestic policies in the US. One major development has come with President Trump’s new tax plan and the administration’s efforts to try and eliminate the estate tax. The removal of this tax could have an effect Americans and art dealers, collectors, and those working in this industry more widely. The impact of the removal of the estate tax is a topic we’ve covered before but now we’ll take a look at the effect of the latest Trump tax plan on the art market.

While the specific details surrounding the changes of the tax are still evolving, a proposal released by the Trump administration on September 29th sought to further layout the plan. The ambitious plan is seeking to overhaul the American tax system and would do away with the estate tax as well as there being fewer individual tax brackets; there would be three as opposed to the seven that are currently offered. With this new plan, the corporate tax rate would be 20% from the now 35% as well as the rate on individual tax rates could drop to 35% from 39.6%. This new plan has left people divided across the political aisle, and still leaves many important questions unanswered. President Trump has claimed this proposed plan will make filing taxes easier and is an attempt to rework a sometimes-confusing system.

Impact on the Art Collectors

Part of the confusion stemming from the potential adjustments this plan would present is based on the validity it has so, the larger effects of the Trump ax plan on the art market remain to be seen. Trump’s tax plan outlines changing the tax rate for small businesses. This possible adjustment could impact the way art is bought, sold, and distributed, from the standpoint of collectors, dealers and art buyers. The proposal the Trump administration released however does not currently address how inherited assets that have appreciated value would be handled.

With the potential elimination of the estate tax, this would affect wealthiest Americans, and those who buy and collect art. When It comes to the buy and selling of art works, these are assets that tend to be held onto given the way they appreciate over time. Another way to handle this would be to donate or put art pieces in a trust for people’s heirs. Other elements that the current proposed plan might offer could make it easier for art collectors to keep their assets within their family. Although the Trump administration claims this plan will help to jumpstart the middle class, there are still many unknown factors. The Trump plan would allow for a standard deduction that would double to $12,000 for single filers and $24,000 for married couples.

As the tax code stands currently, the first $11 million dollars of an estate is exempt for married couples. With the potential elimination of the estate tax this could mean that art collections could now be easier to keep within a family resulting in possible interesting effects on the art market. If art works remained in private home collections, this could potentially slow the sale of art works entering museums, gallery spaces and other venues.

Effecting the Wider Art Market

The impact of the Trump tax plan on the art market could also be felt by auction houses where the large sale of major works is typically conducted. With the current speculation surrounding the way it could have an impact on the art world overall, there are still many issues that are open to debate. While this new tax plan would greatly benefit the wealthiest buyers on the art market, the larger implications are that people would continue to hold onto their art assets.

In terms of museums and other charitable organizations there is still much to be determined. However, if the current loopholes for such buyers are left in play this could potentially be a good thing for the art market. However, with many moving parts such as the way Congress will vote to potentially disseminate the plan, and the ways in which this would trickle down to the various parts of the market. This could also potentially stimulate the art economy resulting in more sales all around.

While it is hard to determine what will become of the estate tax and the overall effect of the Trump tax plan on the art market, it is something that is evolving. While these elements continue to be worked on a political and social scale people inside and outside of the art world are anxious to see how this what will become of the estate tax and the Trump tax plan.

 

About the author: Anni Irish has been a contributing writer to several online publications including Boston based publication, The Dig, New York Arts Magazine, and ArteFuse among others. She holds a BFA from the School of the Museum of Fine Arts/Tufts University, an MA in Gender and Cultural Studies from Simmons College, and an MA in Performance Studies from New York University.

 Related Blogs:

How Abolishing Estate Taxes Impacts Art Collectors

Important Tax Tips for Art Collectors

Establishing a Papertrail for Your Art Collection: What You Need to Know

How Abolishing Estate Taxes Impacts Art Collectors

Estate Taxes Impacts Art Collectors

With President Trump’s new proposed tax plan that was revealed on April 26, there are many changes that have the potential to affect people across a broad spectrum. One of the key proposals is the elimination of estate taxes. Abolishing estate taxes impacts art collectors and their heirs. While the potential long term of effects of this proposal have yet to be determined, there are options for art collectors to help weather the storm.

What are Capital Gains Taxes?

First, some background on the current state of taxes for art collectors. Capital gains are the profits made from the sale of a capital asset which include stock shares a business, land or works of art. They are usually included in taxable income, but can be taxed at a lower rate in most cases. It is in the buying, selling or exchange of an asset that a capital gain usually becomes an issue.

What are Estate Taxes?

The estate tax, also known as the inheritance or “death tax,” outlines that an estate must be worth at least $5.49 million prior to it being taxed by the federal government. The highest rate for the tax is 40% and the average paid on these kinds of assets is roughly 16.6%. As reported by The Art Newspaper, it may seem like eliminating this tax would be beneficial for art collectors because they’d be able to leave their collection to their heirs without the threat of an estate tax. But, there’s another proposed change that diminishes the appeal of this course of action.

The Game Changer

The step-up income tax basis allows beneficiaries to lower the capital gains tax on art they inherit that has increased in value. Most art collectors are purchasing pieces with the belief that they will increase in value. The 2016 Deloitte Global Art & Finance Report found that 72% of art collectors bought artwork based on their passion for it but they also viewed it as an investment. Eliminating the step-up basis and estate taxes impacts art collectors who have seen their art increase in value. Either they or their heirs would incur higher capital gains taxes.

What Options Do Art Collectors Have?  Oxford street

Despite the ambiguity surrounding the taxes on fine art, there are actions that collectors can take to help protect their investments. While collectors can choose to manage assets on their own, it 213 Oxford St, London W1Dcan add to the stress of trying to figure out what exactly needs to be done, and is sometimes best left to be handled by professionals who work in the industry.

Borro can help alleviate the tax impacts on art collectors in the following ways:

  • Borro can manage the sale of art while also providing a percentage of the expected proceeds upfront. This can be a solution for individuals or companies looking to sell before the possible removal of the step-up income basis.
  • When it comes to issues of estates and heirs wishing to sell assets on their own, but lacking the funds to pay capital gains taxes afterwards, Borro can assist by allowing them to borrow against other luxury assets in their collection to cover the taxes.
  • Borro also allows collectors or heirs in need of funds for any reason to borrow against pieces of fine art to avoid incurring capital gains taxes.
  • Finally, if the estate tax is eliminated but the step-up income basis isn’t and collectors decide to increase their collections without the fear of burdening their heirs with taxes, Borro can help them secure the funds. Borro can provide a percentage of the purchase price

While the circumstances surrounding the new Trump tax plan are unknown, art collectors can look to Borro as a resource. By using the outlined services, Borro can help minimize how strongly abolishing estate taxes impacts art collectors.

Disclaimer – Collectors can get additional information on this topic here but collectors should follow up with an accounting professional for the most accurate and up-to-date information.

About the author: Anni Irish has been a contributing writer to several online publications including Boston based publication, The Dig, New York Arts Magazine, and ArteFuse among others. She holds a BFA from the School of the Museum of Fine Arts/Tufts University, an MA in Gender and Cultural Studies from Simmons College, and an MA in Performance Studies from New York University.

Related Blogs:
Important Tax Tips for Art Collectors
Establishing a Papertrail for Your Art Collection: What You Need to Know
Fine Art as an Investment

Important Tax Tips for Art Collectors

Tax Tips for Art Collectors - art collection

Source: Getty Images

For art collectors, there are few things as precious or meaningful to them than their carefully curated collection. While an art collection can provide a great deal of satisfaction and fulfillment to an art enthusiast, it can also come with unexpected tax impositions. In order to avoid paying through the nose to cover the cost of those taxes, a great deal of forethought and planning is needed. Enclosed within this article are valuable tax tips for art collectors to actively and strategically plan for the income associated with their collection.

Understanding Luxury Assets

In many cases, an art collection is considered to be a capital asset or “luxury asset” by the Internal Revenue Service (IRS). These types of assets are subject to their own specific set of tax laws and rules. For example, any piece of art that is owned for more than a year will be subjected to taxes on the owner’s capital gains derived from that ownership.

*Tax Tip: The higher tax placed on capital gains can be avoided if the art piece is sold within one year of purchasing it. Instead, it will be subjected to regular income tax which can easily be offset with income tax deductions. However, at times the current rate of taxes on capital gains will be lower than that of income taxes.

The Importance of Status for Tax Purposes

The way in which the IRS will assess taxes on an art collector is dependent upon their status as an art collector, dealer, or investor. Art dealers are subjected to harsher tax brackets than investors and collectors. Investors and collectors can receive tax benefits not afforded to dealers.

*Tax Tip: Art investors and collectors can defer payment of taxes or reduce the amount owed with itemized deductions. Tax deductions can also be accomplished by donating art works to a charitable donation with the deduction amount being up to 50% of the piece’s value.

Maintaining a Papertrail for Art Collections

In many cases, an art collection is considered to be a capital asset or “luxury asset” by the Internal Revenue Service (IRS). These types of assets are subject to their own specific set of tax laws and rules. For example, any piece of art that is owned for more than a year will be subjected to taxes on the owner’s capital gains derived from that ownership.

*Tax Tip: The higher tax placed on capital gains can be avoided if the art piece is sold within one year of purchasing it. Instead, it will be subjected to regular income tax which can easily be offset with income tax deductions. However, at times the current rate of taxes on capital gains will be lower than that of income taxes.

The Importance of Status for Tax Purposes

The way in which the IRS will assess taxes on an art collector is dependent upon their status as an art collector, dealer, or investor. Art dealers are subjected to harsher tax brackets than investors and collectors. Investors and collectors can receive tax benefits not afforded to dealers.

*Tax Tip: Art investors and collectors can defer payment of taxes or reduce the amount owed with itemized deductions. Tax deductions can also be accomplished by donating art works to a charitable donation with the deduction amount being up to 50% of the piece’s value.

Maintaining a Papertrail for Art Collections

Regardless of a taxpayer’s status, it is of utmost importance that the individual keep records to track the collection’s tax basis and to take advantage of tax benefits. A papertrail for an art collection allows an individual to establish provenance and ownership of the artwork. Along with providing evidence of an artwork’s fair market value.

*Tax Tip: The receipt and artwork appraisals serve to establish the individual’s tax basis for the artwork, allowing them to track the work’s unrealized capital gain. This enables a determination of the potential tax implications of selling, transferring, gifting, or donating the artwork. The receipt should include the below information:

–          Date of acquisition

–          Name of purchaser

–          Name of seller

–          Purchase amount

–          Name of artist

–          Description of the artist

An Invaluable Resource for Art Collectors

Tax Tips for Art Collectors - Viewing Art

Source: Thinkstock

It is important for art collectors to take advantage of resources that enable them to pay their tax bill, liquidate their art as needed, or even take out a loan against their luxury art collection, when needed. Managing the finances of an art collection can become complex and intricate and a valuable financing partner can go a long way in the proper management of any art collection.

Borro is the leading online platform for luxury asset lending. When funds are needed quickly, rather than selling fine art, Borro can provide a loan against it allowing the collector to avoid a capital gains or income tax. When a collector has already sold a piece and now needs funds to pay the tax bill, Borro can lend against other pieces in their collection or other luxury assets such as luxury & classic cars, luxury watches, jewelry and wine.

Invaluable resources like Borro are a crucial component to managing the taxes associated with buying and selling art.

Disclaimer – Collectors can get additional information on this topic here but should follow up with an accounting professional for the most accurate and up-to-date information.

Related Blogs:
Establishing a Papertrail for Your Art Collection: What You Need to Know
The Art of Appraising Collectible Assets
Luxury Assets Key for Portfolio Management