By: Carolyn J .Lynch
Perhaps you inherited a Romaire Bearden oil from your grandmother’s estate. Or maybe you picked up a black and white photograph from your neighbor’s daughter’s art show at the local coffee shop.
What constitutes art is personal. But in some cases, ignoring its potential to diversify your investment portfolio–along with the tax ramifications that come with buying and selling art–could be a disservice to your net worth. When it comes to art, love and liquidity need not be mutually exclusive.
Since the early 2000s art, particularly contemporary fine art, has emerged as a lucrative and legitimate asset class in investment portfolios–among the usual suspects of equity stocks, bonds and real estate.
So why not start a collection? Let’s begin with a word of caution: Don’t expect high returns … just yet. Though returns on art have generally outpaced typical equity stocks over the last decade, keep in mind that those returns are based on fewer transactions than trades among traditional financial instruments and commodities. Furthermore, data are based on high dollar transactions, and often, owners have had pieces in their possession for several years.
If you’re looking to hold on to piece of art long enough to see serious appreciation you should make sure you enjoy having it around. Seek out works that inspire or touch you. Does it make you happy or spark a deep connection?
While high end auctions and sales may not be accessible to everyone, opportunities to get in front of emerging artists and reputable sellers exist. Start with an artist’s entry level tier works and build a relationship, suggests Stephanie Barton of Investopedia. “Learn about their education, commissions and exhibits.” Connect with gallery owners and other venues that showcase work you like. Go to events. Become an insider.
Local auction houses are often replenished weekly with art and collectibles from estate liquidations. Online auction houses and databases are equally well stocked these days, and are available to all bidders. But novices should use extreme caution. If you are interested in a piece you see online, try to look at it in person if at all possible, or ask the auctioneer for authentication.
If your collection starts with a gift–an inheritance or bequest from a friend or relative–find out what it is worth. Substantiating the original cost is important whatever your plans for keeping or selling. When art is inherited, its value is “stepped up” to fair market value at the time of the decedent’s death. Art that is gifted generally maintains its original cost basis, but the tax ramifications are more complex and may require additional tax filings for the giver.
If you do end up selling a work of art, remember that the buyer should pay sales and use tax to the seller. The seller is responsible for submitting tax to the proper authorities. Keep in mind, if you have benefitted from a gain on a sale there will be tax consequences.
Consider art as a long-term investment. The art market can show huge returns in boom times, but it can also be fickle, with values plummeting during recessionary times. Likewise, styles of art go in and out of fashion.
With some effort, education and thoughtful planning, you can begin to build your own collection to enjoy now. And who knows? Someday it may be worth something.
Carolyn J .Lynch, CPA is a director at Central Maryland CPA, a full-service tax and accounting practice, headquartered in Fulton.