Tax Mitigation Strategies for Art Collectors and Investors – Part 1: Buying and Selling Artwork

For art collectors and investors, there is a significant amount of tax savings to be had—if you know how to plan and structure your transactions correctly. This applies to acquisitions and sales as well as donations to charity. In this two-part series, we will be discussing the various ways in which art collectors and investors can minimize their tax burden with the help of a Boston tax attorney. Here in part one, we are covering the tax advantages that can be achieved through strategic artwork purchases and sales.

Artwork-Related Tax Deductions for Individuals and Businesses

Tax Advantages for Art Collectors and Investors

When it comes to artwork, the Internal Revenue Service (IRS) makes a distinction between individuals who purchase art for “personal use” and those who purchase art as collectors or investors. While all artwork acquisitions are eligible for capital gains taxation rather than ordinary income taxation at the time of resale (assuming the piece is held for a year or longer), only collectors and investors can claim losses for artwork that has depreciated in value. Simply displaying a piece of artwork in your home can be enough to characterize an acquisition as being for “personal use,” so collectors and investors must think carefully about when and whether to display the pieces in their collections.

Tax Advantages for Businesses that Acquire Artwork

For businesses, buying artwork can be an effective way to reduce taxable income; however, it is important to be aware that the IRS does not allow businesses to claim depreciation for all works of art. If a piece of art is considered “valuable and treasured,” then it is generally not depreciable under federal law. On the other hand, if a piece of art is to be used in the business (i.e. if a professional office purchases custom-designed chairs for its waiting room), then the business can treat the artwork as a depreciable asset for federal income tax purposes.

The IRS’ Appraisal Requirement for Artwork Deductions

In order to claim federal tax deductions for artwork valued at $5,000 it is necessary to have the work appraised. When selecting an appraiser, it is important to choose carefully, as the IRS will scrutinize the appraisal, and agents are more likely to be skeptical of an appraisal provided by an individual who does not specialize in the specific type of work for which the deduction is claimed.

Additionally, for works with a claimed value of $50,000 or more, the IRS relies on an Art Advisory Panel consisting of, “up to 25 renowned art experts,” to determine whether taxpayers’ submitted appraisals are accurate. In order to avoid issues with their filings, taxpayers can seek certification of their appraisals from the IRS for works worth in excess of $50,000, although this carries a fee of $7,500 for one to three items and $400 for each additional piece that has been appraised.

Speak with a Boston Tax Attorney at Thorn Law Group

Thorn Law Group is a Boston tax law firm that represents individual and corporate taxpayers with regard to tax planning and tax controversies. If you have questions and would like to speak with Attorney Kevin E. Thorn, Managing Partner of Thorn Law Group, we invite you to call 617-692-2989, email ket@thornlawgroup.com,  or contact us online for a confidential consultation.