Art Appreciation
Donating Artworks Can Make Dollars as Well as Sense
by
Cindy Hill, for Fine Art Registry™
Art appreciation is not only the joy of living with tangible expressions of human creativity; it is also the economic benefit which accrues when you keep artwork over the course of time. Quite simply, in the vast majority of instances, the value of the artwork goes up with each day that passes from your acquisition of the piece. Now, granted, in some cases that appreciation in value may not be significant, and sometimes, albeit rarely – perhaps in the case of a fuzzy poster from the 1980's that has now gone out of style, or a really, really ugly lamp – the value may go down over time. But for the most part, that small painting you bought from a local artist in 1968 for $25 is probably now worth at least $100 or more, and the $1,000 painting you bought while vacationing in the Far East a few years back may well have gone up in value by an order of magnitude or more if the artist or their particular regional style has since attracted the attention of art journals or has been the subject of a television documentary.
Whether by small increments or by leaps and bounds, the artwork you own today is most likely worth more than when you bought it. This makes art an appreciating asset. And, assuming that you are not the artist, but rather a purchaser and collector of art, this means that if you sell the artwork, the difference in value between what you paid for it – your basis – and what you sell it for is 'capital gain' and is subject to the capital gains tax. For example, if I purchased a porcelain figurine when I was in high school for $20, and today I sell it on eBay for $1,000, my capital gain is my return minus my basis, or $980.00. I will pay capital gains tax on $980.
How much capital gains tax you pay depends both on your income and on the nature of the capital gains asset that you are selling. The bad news is that for sales of most 'collectibles,' which includes artwork, the capital gains tax rate is 28 percent. Ouch! On that $980 capital gain, that means I pay around $250 in taxes. Still, over $700 is a tidy sum to pocket on the sale of an item that I have simply had sitting around in my attic for 30 years. So if I’m in need of cash, selling the appreciated asset, paying the capital gains tax, and pocketing the remainder of the return might be just what I need.
However, let us imagine for sake of argument that this past year has been a bumper year for me in terms of income. My books have sold like hotcakes, my legal consulting services have been in high demand, my band has been playing high-paid gigs every weekend, and I'm simply swimming in more money than I can handle. In fact, my big problem is that I'm now facing an overwhelmingly huge income tax bill on the windfall of cash that has floated my way.
Were I actually in this situation, I would find myself looking less for additional income than I would be looking for tax deductions to help offset my income and reduce my tax obligation. One thing I could do is root through my attic and find things like that box of porcelain figurines that I was given by a great-aunt in 1966 and which I would never in a million years display in my home, or anywhere other than perhaps planting them on the desk of my bitterest enemy in order to humiliate him, and donate them to some nonprofit entity that might feel differently about them than I do. I guess that would be donating an unappreciated appreciated asset to a place where it will be appreciated. (Hey, it’s tax law; it's supposed to be confusing.)
If the item I am donating qualifies as long-term capital gain property (a tangible asset that is not inventory, and which I have held for more than one year) AND if I am donating the item to a public nonprofit entity (such as a charitable or educational qualified tax exempt nonprofit corporation, or a public body such as a municipality) AND if that public nonprofit entity will be using the donated object for purposes related to its charitable purpose (such as a senior center displaying the artwork to improve the quality of the residential environment for its inhabitants, or a municipality displaying art as part of a public arts program, or a museum which contains a porcelain figures collection of items related to my donations, or a nonprofit school of design arts which uses porcelain figurines as teaching examples), THEN I will be able to file a tax deduction for the appreciated value of the item as a charitable donation. While I do not pocket $700 (and then pay income tax on the full amount of the rest of my income), I wind up reducing the amount of my taxable income by $1000 - the item’s full fair market value.
The more I donate – or the higher the appreciated value of the items I donate – the lower my taxable income. If I'm in a high income tax bracket, it doesn't take long to find the point at which I can actually make money by donating appreciated assets to offset income that I'd otherwise pay taxes on. This technique can be especially useful in years which see an unexpected or one-shot windfall of income which could not be divided out over time to minimize the tax consequences.
Before you make any such donation, though, do be sure to consult your accountant and/or attorney. Donating appreciated assets might not be the best tax savings technique for you given your circumstances, and you will need to discuss the timing of your donation in order to maximize the economic benefits. And there are other techniques to consider, such as leaving artwork to a charitable entity as part of your estate, or engaging in a bargain-sale, in which you receive a payment for the partial value of the asset while deducting the charitable donation for the remaining value. The tax laws also change regularly, so you’ll want to work with a tax professional who can tell you if an upcoming change will make your donation more or less effective at any particular time.
Your tax professional can also help you satisfy any IRS concerns about the donation by making sure to obtain a letter of receipt for the item from the nonprofit entity you donated it to, which states that the nonprofit organization received and wanted the item and how it will be used in a manner that relates to their nonprofit purposes. You will also likely need a valuation of the item performed by a qualified appraiser, and if its value is over $50,000, you’ll likely need to get a Statement of Value from the IRS which effectively pre-approves the amount of your intended donation and deduction. If you registered your artwork with Fine Art Registry™ at the time of its acquisition, this will also help support your record of ownership, which can only help to simplify the tax filings and maximize the economic return of your donation.
In addition to the tax deduction, donations of appreciated assets mean that more valued art items find their way to public and charitable hands, be that in use for educational purposes or on public display to bring cultural and aesthetic benefit to many lives. And that is a work of art we can all appreciate.
— by Cindy Hill
|
March 8, 2008
|
Print Version - 
PDF (785 Kb)
Discuss article | 
Print this page | 
The views and opinions of individual authors/contributors expressed on the FAR® web site do not necessarily state or reflect those views and/or opinions of Fine Art Registry™ or its agents or subsidiaries.
Fine Art News Feed
