If you currently collect art, or you are interested in collecting it, you might be wondering what tax implications are involved with art purchases. This is an especially important consideration in light of changes to tax laws that have taken place in recent years. Given the fact that art experts state that the current art market is exceptionally strong — now is the time for current and prospective collectors to dig into the tax laws and look for ways to financially benefit as they grow their collections.
Tax Write Offs
Among things to write off on taxes are deductions, tax credits, and expenses you claim. So what art purchases can you write off on taxes? Many countries allow tax write offs for business expenses, like artwork for the office, and losses associated with office artwork depreciation might be written off in some situations.
But there is a related question, do you pay tax on selling art? While art sales typically won’t fall under tax expense categories, donations often will. Donating artwork tax deductions are available in most countries in some form.
Rules differ from country to country and even state to state, so if you don’t want to pay arts taxes, examine how tax write offs work below.
Art and Taxes in the United States
In the past, US based art collectors made use of the IRS’s art tax deductions made possible by IRS code section 1031. These deductions, also known as like-kind exchanges, permitted art collectors to make exchanges of real property for other real property of the same type or “like-kind.” Under the code, the person making the exchange was not required to recognize a gain or loss. These tax write-offs allowed art collectors to grow their collections on a tax-free basis. Unfortunately for art collectors, congressional measures closed the loophole in late 2017.
While the benefits of art 1031 like-kind exchanges are gone, art sellers can now capitalize on the tax benefits offered by a new tax break: Opportunity Zones. The following example provided by finance and art experts points to the benefits Opportunity Zones can have for sellers of art:
“Say you previously bought a Warhol for $10 million and you now sell it for $11 million. Instead of paying tax on the $1 million gain, you take the $1 million gain and invest it in an opportunity fund in 2019. If you keep it in that fund until 2026, then you get a 15 percent basis bump up (an adjustment in the value of the gain that lowers the tax owed) and you then pay the tax on the deferred gain of $750,000. If you keep it in the fund for at least 10 years, you shelter any appreciation from tax when you ultimately sell.”
Art collectors may also be interested in the tax deductions available for donating their art collections. Charitable donation of collectibles is a great way to make art tax deductible. According to wealth advisors, there are six main criteria for qualifying for a tax deduction for donating art:
- You must donate the art to a public charity that was formed in the US.
- You must have owned the artwork you are donating for over a year prior to donating it.
- The art donation must be used by the charity in a way that aligns with their charter and furthers their organizational mission.
- The charity has to keep the donated artwork for at least three years.
- You must get a qualified appraisal of the artwork to be submitted with your income tax return.
- You must fit the IRS definition of an art collector or investor.
It’s important to be aware of the potential taxes associated with buying or selling art. This can help a buyer to prepare financially and avoid any unwanted (and expensive) surprises. The taxes you pay on art will largely depend on how the IRS categorizes you within the art scene. When investors and collectors sell art, they are subject to capital gains tax. If an art buyer sells a piece in the same year that he or she purchased it, the buyer will also be subject to income tax on the value of the piece of artwork. This is an important consideration for those interested in flipping art for profit.
When purchasing art, a buyer will need to pay sales tax on the artwork. Each state has its own sales tax, so a buyer will need to be aware of the taxes set forth by the state in which a sale takes place. If the buyer is purchasing a piece and then immediately shipping it to another state, the buyer will not need to pay the state sales tax, but will instead need to pay a use tax in the state where the art is being shipped.
Art Assets in the United Kingdom
Art and taxes in the UK is similar to the US. Art collectors in the UK must be aware of the resale tax. This tax is in place to provide artists and artists’ heirs with royalties for resold works of art. The art seller collects this tax and then provides the royalties to the party to whom they are owed. Art sold within the UK is also subject to VAT tax, which is a tax that a seller typically integrates into the cost of a work of art when it is being sold. There is also a UK import VAT on art. This VAT on art imports is currently at 5%. (https://www.artbusinessinfo.com/vat-for-artists.html)
UK based art collectors can make use of two tax incentives if they are looking to get a tax deduction via their art collections. These incentives are known as the Acceptance-in-Lieu scheme and The Cultural Gifts scheme. These incentives allow art collectors to donate their works of art in lieu of paying a tax or in exchange for a tax offset.
Tax Considerations for Canadian Art Buyers
In Canada, under Capital Cost Allowance laws, Canadian art buyers can deduct a certain percentage of the cost of an artwork purchased for a business to be used as office decor, as artwork is a fixed asset. This Canadian art tax deduction allows Canadian businesses to support the arts in a unique way that benefits them financially, and it is the only Canadian art tax deduction. However, Canadian art collectors should be aware that art purchases are subject to taxes and art sales may be subject to capital gains taxes.
Taxes for Australian Art Collectors
Again, tax deduction tips for Australians is similar to other countries. Australian art collectors have two different routes when it comes to lowering their tax bills for art purchases. Private collectors can opt to purchase art with the goal of one day donating it to a charity or institution. The other option art collectors can make use of is to purchase art as a business owner for use within the business. This allows them to deduct the cost of the artwork as a business expense, and thus be tax exempt. Art collectors who do not take advantage of these benefits will have their pieces be subject to capital gains tax.
Across the globe, interest in acquiring artwork is increasing. If you are interested in joining the art collection world, familiarizing yourself with the tax laws of your country and municipality will help you to ensure that you’re able to enjoy the pieces you collect without having to worry about paying excessive taxes on them.
important disclosure: please always check with a certified accountant or (and) tax attorney to help with your investment plans. This post attempts to give you a basic introduction to the topic from known public sources and not legal or financial advice.