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

About the Author:

Shani is the Senior Vice President of Marketing at Borro Private Finance.