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.

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

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.