Many works of art and collectibles have appreciated significantly in value. Internal Revenue Code (IRC) Section 1031 permits tax deferral on the sale of artwork provided the investor adheres to the Treasury Regulations and IRC rules and timelines. Investors with private art collections held primarily for investment or for use in their trade or business can defer 100% of their capital gain tax liability if they exchange one art collection or a single piece of artwork for another. Examples of qualifying personal property may include many different types of art as long as the investor is able to substantiate that such property was purchased and held primarily for investment purposes or use in a trade or business. This is often the case with fine art and collectibles held for appreciation. The types of personal property that may qualify for a 1031 tax deferred exchange may include: fine art, sculptures, prints, collector coins, precious gems, antiques, classic automobiles and many other collectible investment assets. The obvious benefit of exchanging artwork is that the investor does not have to pay the 28% capital gain tax that would otherwise be due on the sale of appreciated artwork. An investor who displays his collection in his place of business may be able to substantiate that it is held for use in a trade or business.
Assume an investor is selling a Renoir for $2 million that was purchased for $500,000 and thus has $1.5 million of gain. After the investor consults with her tax advisor, she determines she will owe approximately $420,000 in capital gain taxes based upon the 28% capital gain rate for the sale of the Renoir absent a 1031 exchange. However, if she sets up a 1031 exchange before closing on the Renoir sale, all of the capital gain taxes can be deferred. This leaves the investor with $2 million of equity and she would have $2 million to reinvest in other artwork, rather than $1,580,000 after-taxes, thus maximizing her purchasing power and having the benefit of future appreciation in value on the full $2 million.
| Exchange | Sale | |
| Value of Artwork | $2,000,000 | $2,000,000 |
| Capital Gain Tax (28%) | $0 | $420,000 |
| Proceeds to Reinvest | $2,000,000 | $1,580,000 |
For more information, click here: 1031 exchanges of artwork.
1031 Basics: Closing Costs
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A frequently asked question is “What expenses can be deducted from the exchange proceeds without resulting in a tax consequence?” Although the IRS has not published a complete list of qualifying expenses, there are some rulings that provide general parameters. For an overview of items that are exchange expenses click here: 1031 exchange closing costs. |
Beware of the Fine Print in the 180 Day Exchange Period Rule
For certain exchangers, the exchange period can be shorter than 180 calendar days if the sale of a relinquished property closes on or after October 20, 2011, but on or before December 31, 2011. Learn more about how you can get the benefit of the full 180 day exchange period even if the relinquished property closes during this critical time period.
Review Year-End Tax Planning Opportunities
This information was provided by J.H. Cohn: When the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 was signed by President Obama in December 2010, it not only included extensions through 2012 to many expired provisions and created clarity regarding 2011 tax rates and rules, but also prompted tax planning opportunities regarding deductions, deferred income, and enhanced estate planning, among other benefits. Among the opportunities individual taxpayers may be in a position to take advantage of:
- Leverage Standard Deduction by “Bunching” Deductible Expenditures
- Consider Deferring Income
- Time Investment Gains and Losses and Consider Being Bold about It
- Take Advantage of Generous—But Temporary—Business Tax Breaks Under §179
- 100 Percent First-Year Bonus Depreciation Opportunities Exist
Click here to access information prepared by J.H. Cohn on these tax topics.
Recorded Webinar: 1031 Exchanges in the New Economy
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>> Instantly listen to a recording of the recent one hour webinar “1031 Exchanges in the New Economy: How Investors and Real Estate Professionals Can Benefit from Trends in 2011” by clicking on Listen Now. |