A client inherited a great contemporary work. Another told me about a plein air painting, owned by her grandfather since 1930, in her possession for fifteen years. Both clients want the works to MOVE ON, but the question is… HOW? How do you decide to give your art, valuable furniture, or a collection to heirs, versus selling, or donating? The decision sometimes involves a client knowing MORE about MONEY and TAXES involved as relates to the appraised value of art.
I’m a certified member appraiser, not a tax advisor, but I collaborate with accountants in this kind of decision-making process. Rough guidelines appraisers use as a partner in this process follow. Gifting to both charity and to heirs involves many tax rules, so call your tax professional first.
Art Value a Challenge
The art market is NOT a public fulltime market, and is largely unregulated. This often makes determining value a challenge. Value depends on the purpose of the valuation. For example, if you want to sell, you compute “market value,” a value less commission(s), based on a future marketplace. If you insure, you look for replacement value, often retail price. When donating or giving to heirs, an appraiser concludes Fair Market Value. This usually means the hypothetical value at the time of your gift or your death based on prices paid at (oftentimes) auction.
What makes unique things difficult to value? The lack of consistent comparable sales in a given market is often the difficulty. That’s where an appraiser comes in.
“Lifetime” or Annual Gifts:
A “lifetime gift” is subject to tax for gifts over $16,000. An unmarried giver pays the taxes of a gift over $16,000 in a given year.
If you give collections or objects annually to your heirs, the objects come out of your estate, sometimes a desirable thing. The recipient of the gift, perhaps a daughter, must use your “tax basis” and pay capital gains on a sale. Her basis is what you paid for the piece or the appraised Fair Market Value, whichever is lower, to compute gain or loss of the sale of the object for federal income taxes. In short, if the recipient sells the piece, she pays federal, and sometimes state, capital gains tax on the total appreciation of the art from the date of its ORIGINAL purchase. Meaning the art’s appreciation since YOU purchased it, not since your daughter inherited it.
Bequests
A testamentary bequest is a gift at the time of your death. If you gifted more than the lifetime exclusion (at this date 12.6M), your estate pays federal transfer tax. However, the artwork receives a new COST BASIS. This sometimes works out well due to the fact of high appreciation in the art market over time. Ask your accountant to do the math if you consider giving to your heirs. Lifetime gifts vs testamentary bequests involves different rules with different tax ramifications.
Donations
In the case of that Plein Air painting needing to MOVE ON, my client considered donating the art to receive a federal tax deduction. She needed to hold the piece longer than one year to make it long-term capital gain property in the eyes of the IRS. As a donor she may deduct up to thirty percent of her adjusted gross income, IF she gives to a PUBLIC charity. If she chooses a PRIVATE charity, she deducts twenty percent of her AGI. If she gives to a charity after death, her estate may be eligible for an unlimited federal estate tax deduction for the Fair Market Value of the work.
So, you see why you need your accountant to help you through these kinds of decisions. You may need an appraiser to give you the value of a work or of a collection to TAKE to your accountant for these decisions.
The easy road OUT: SELLING
To figure out what you COULD make in a sale, you need to know MARKET VALUE, including things like deduction for commission(s), shipping, and insuring. MARKET VALUE is time based, meaning we conclude Market Value for a given sales date in a given market.
The IRS, when a taxpayer SELLS, makes a distinction between you as an inventor and you as a collector! Speak to your advisor.
When COVID hit auctions became the BIGGEST MARKET for sales. This isn’t always the best market if you want to remain anonymous, or you want to sell immediately, or sell to a gallery specializing in a given artist or artwork.
Pros: auctions are transparent as to bidding; you can find auction results online. Auctions give you an auction estimate as you consider a sale, sometimes for free.
Cons: auctions today offer discreet ‘features,’ such as allowing a seller to set a minimum acceptable price, or allowing a consortium to sell the work, or a private treaty sale, which is NOT transparent. Since the auction market grew HUGE during COVID, the auction world became a virtual Wild West. Auction houses are in the private sales game too: from YOU to ONE OTHER client of theirs, and extraordinarily little regulation around these transactions exist.
What about galleries?
Yes, commissions might come in higher, but you get a more targeted, attentive partner in the sale process, and even a more targeted and higher dollar figure buyer. Gallery commissions sometimes come higher than auction house commissions, but not always. Auction commissions work on a sliding scale, getting lower as the value of a work of art increases.
To make these kinds of wise decisions about valuable pieces, I can help you find MARKET VALUE, REPLACEMENT VALUE, and FAIR MARKET VALUE. Those values, as I said, are values concluded for different purposes, and often mean different dollar figures. Then you have what you need to take these issues to your financial advisor or accountant.