Note: With the passage of the Tax Cuts & Jobs Act of 2017, 1031 exchanges of personal property are no longer valid.
Fine art, antiquities, and other collectibles that have been held primarily for investment or use in a trade or business may be disposed of tax deferred through the use of a 1031 exchange.
The gain from the sale of collectible artwork is taxed at a higher maximum capital-gain rate of 28% (rather than 15% or 20% for other capital-assets like real estate). This is why the exchange of collectible artwork is so important - because the rate of taxation is nearly double.
C-corporations (selling appreciated artwork) may have to pay tax at ordinary income-tax levels as high as 35%. By using a qualified intermediary, you are allowed to postpone the recognition of gain indefinitely on the sale of qualifying-artwork by acquiring like-kind replacement artwork.
Artwork Exchange Requirements
The 45 day / 180 day requirements must be met with artwork exchanges.
In order to defer all of the gain, your replacement artwork typically should be equal or greater in value than your old relinquished artwork, and all of your equity (or proceeds) from the sale of your old relinquished artwork should be reinvested into your new replacement artwork.
Many people think of artwork as an item of personal property used for adorning the home. Those items that are used for personal use may not qualify for 1031 treatment. But, artwork that has been used in one’s business or held for investment purposes can qualify for 1031 like-kind tax treatment.
How can Artwork Be Used in a 1031 Exchange?
Let’s say that you have a hotel, and you place valuable pieces of artwork in the hotel as decorations so that people will patronize the hotel. Those pieces of art that are held in the hotel are being used in the business. And, if the value of those pieces of art increase and you later want to dispose of them for other artwork, why not defer the gains on that appreciation of value? Why not keep your money working for you rather than unnecessarily and prematurely paying on that appreciation? Code Section 1031 of the Internal Revenue Code allows you to move equity from one piece of artwork into another piece of like-kind artwork as long as both properties are held for a qualified purpose – investment or use in your trade or business.
Restrictions on Artwork Exchanges
The big question when it comes to artwork 1031 exchanges is:
“How restrictive is the like-kind requirement?”
Can we exchange a sculpture for a painting? Can we exchange a lithograph for a vase? The answer is wide open. If you want to be on the safe side constrain yourself to exchanges within the same medium - a lithograph for a lithograph, a painting for a painting. If however, you want to push the envelope, bare in mind that there is this older private letter ruling relating to Code Section 1033 that would seem to indicate that the standard is more restrictive.
1031 Exchanges of Artwork in Minneapolis
There are tax practitioners that are of the belief that “art serves the same purpose” whether it is a photograph or a painting – a sculpture or a vase – and that the standard under 1033 is more restrictive than the standard under 1031. Taxpayers may have greater latitude than this old private letter ruling indicates. The problem is that the IRS has not issued any definitive regulation in the area of artwork to put our minds at ease.
We have been assisting people with artwork exchanges for decades. Our service area includes the Twin Cities Metro, greater Minnesota, as well as other states. Contact our Minneapolis office today to speak to a 1031 artwork exchange professional - 612.643.1031.