Do you own art, antiques or collectibles? Whether you’re a collector that is surrounded by great works, or you only have the antique furniture that your great-grandmother left you, it is important to understand the unique tax benefits and planning opportunities that are available for these assets.
Art, antiques and collectibles are mentioned in portions of the Internal Revenue Code, usually with more stringent rules surrounding them. For example, currently capital gains from the sale of art, antiques and collectibles are taxed at 28%, whereas the capital gains for most other assets are taxed at 20% or less depending on your income tax rate. Note that by donating the same piece of art instead of selling it, you would remove the 28% capital gains tax and you would receive an income tax deduction for the appraised value of the art.
These types of assets are ideal to pass through an estate. Inherited assets enjoy a special “stepped up” basis. This means that the person who inherited the asset can reflect their basis to be the value at the date of death of the person they inherited the art from. The new basis is the value placed on the art by an appraiser hired by the estate.
Example: You bought a piece of art 40 years ago for $500. That art is now worth $20,000. Your basis is the $500 you paid for it. If you sold the piece for the $20,000, you would have a taxable capital gain of $19,500 ($20,000 – $500).
However, if you hold on to the piece, when it passes through your estate, the heir’s basis is the value at the date of death. In this case, the piece was worth $20,000 at the date of death (the date they inherited). If they then sell the piece for $20,000, their taxable capital gain is zero.
The step up in basis works well for appreciated assets. But keep in mind that this works both ways, and there could also be a “step-down” in basis if the value of the art is less than the original purchase price or cost basis.
When donating art, antiques, or collectibles, your charitable deduction is the fair market value at the time of donation. In the example above, even though you had only paid $500 for a piece of art, if the item was donated, the charitable contribution deduction would have been the $20,000 appraised value.
Note that the donation of art to a qualified public charity must meet the “Related Use Rule” or you may not be able to deduct the appraised value of the donation. You may be limited to your cost basis in the art.
There are other ways to donate art, such as (1) a bargain sale where the donor receives some cash and a charitable deduction and (2) the partial or fractional interest in the art that is being donated. The rules for either type of donation, bargain sale or partial interest, require planning and having your advisors assist you in the transaction.
The form to use with the filing of your income tax return along with any required attachments to report the noncash donations over $500 is IRS Form 8283, Noncash Charitable Contributions. There must be an appraisal if the value of your donation is $5,000 or over. If the value is $20,000 or more, you must include a complete copy of the appraisal with your return, and also have all parties who were involved in the donation sign the appraiser and the charity Form 8283.
If you donate an item of art that has been appraised at $50,000 or more, you may request a Statement of Value for that item from the IRS prior to filing your income tax return to avoid any potential future audit regarding the donation. Currently the cost for a Statement of Value is a $2,500 payable to the IRS and is usually non-refundable.
The cost of an appraisal, delivery of the art, tax advice and any other related expenses cannot be deducted as a charitable contribution, but you may be able to claim the expenses as a miscellaneous itemized deduction on your tax return, subject to certain limitations.
If you are an artist that is donating art to a qualified organization, your charitable deduction is usually zero except in a very narrow circumstance.
NOTE: The IRS has a special Art Advisory Council that will review art appraisals, above certain amounts, that have been used for gifting, donating, or estate purposes. So be sure your qualified appraiser is above reproach and follows all the rules.
Keep in mind that you should have good appraisals on hand for fine art insurance purposes. If you do not have an idea of the current value of your pieces, then you probably don’t have them properly insured. The appraisals should be reviewed from time to time as values of the fine art will fluctuate, going up and down.
I was working on an estate, and met with the family at the home of the deceased. In this home, I noticed a beautiful collection of Native-American baskets and other collectibles. I knew there had to be value in these items, but there were no records and the items were not insured. After arranging an appraisal, the family was shocked to learn that the collection was worth over $500,000. They had no idea that such a large asset was sitting there uninsured.
I have a client who inherited a painting from his father, and the estate had it valued at $1. Fifteen years later, he started investigating this painting and found that the current appraised value was $300,000. He was in a position where if he sold it, not only would he be hit with a large tax bill, but he had to consider his siblings and the issues that could arise from selling this asset for such a significant sum. He consulted with me, and we took a different approach. I advised that he donate the painting. He liked the idea and it now hangs in the Metropolitan Museum of Art in New York City. He received no cash for the siblings to quibble over, and the client actually received tax benefits, thanks to a $300,000 charitable contribution deduction.
When it comes to estates and money, you have to know what can be done to lessen the problems that will inevitably arise within family dynamics.
Art, antiques and collectibles can make up a large portion of a person’s net worth. You will want to be sure you are getting experienced guidance to protect that investment. If you need someone with experience in this area, contact your Gumbiner Savett partner, or Lionel Sanders, a GS Tax Principal, at firstname.lastname@example.org or 310.828.9798.