Art and collectibles raise a host of unique issues and considerations affecting income tax, insurance, estate and charitable planning. The subject matter is so broad that this brief checklist can at most highlight the breadth and complexity if the topic, not provide a comprehensive guide.
■ Recordkeeping for Art and Collectibles:
Maintaining proper documentation of your collection is vital, and the first step to most other aspects of planning. You cannot insure, appraise, plan or sell a collection without information. Here's some of the info you should keep:
♦♦ What type of collectible (e.g., painting, sculpture) ♦♦ Name or title of the work. ♦♦ Artist or other creator ♦♦ Dimensions (with and without frames, bases, etc.) ♦♦ Signature (is it signed? How? Where?) ♦♦ When made ♦♦ Composition (what is it made of) ♦♦ Ownership history (Provenance) ♦♦ When did you acquire it? ♦♦ How did you acquire it? (self created, purchase, gift, inheritance, auction) ♦♦ How much did you pay and how did you pay (save proof: receipts, bill of sale, cancelled check, certificate of authenticity, etc.) ♦♦ Location (where do you keep it? If multiple locations provide details as to when it is moved and how) ♦♦ Photographs (take good quality photographs, or better yet rely on the ones from a professional appraiser; include inventory number or other description in the photograph) ♦♦ Inventory details (if you have an inventory explain the numbering, where each item is tagged, bar codes, etc.)
■ Income Tax Considerations:
There are a host of income tax considerations to holding art and collectibles. The following is a smattering of them:
♦♦ Are you a dealer in art or collectibles? There are substantial tax implications. A dealer will realize ordinary income on sale, not capital gain, but will be able to deduct expenses a non-dealer cannot. If there is any gray in how this determination applies to you, you should carefully plan and document support for the conclusion that is optimal for you. ♦♦ If you sell collectibles at a loss, your tax deduction is limited to (1) losses incurred in a trade or business, which means your being a dealer; (2) losses incurred in any transaction entered into for profit, though not connected with a trade or business, if you can demonstrate this; and (3) , losses of property not connected with a trade or business or a transaction entered into for profit, if such losses arise from fire, storm, shipwreck, or other casualty, or from theft. IRC Sec. 165. ♦♦ You might be able to engage in a tax deferred exchange of some of your collectibles for others, but only if you can demonstrate that they were held for investment. IRC Sec. 1031. ♦♦ If your holding artwork or collection activities are not engaged in for profit, no deduction attributable to that activity will generally be allowed. IRC Sec. 183. If the gross income derived from your collecting for 3 or more years in the preceding 5 years exceeds the deductions attributable to your collection activity, then, unless the IRS establishes to the contrary, your activity will be presumed to be engaged in for profit. ♦♦ The top capital gain rate for sale of assets held for at least one year is usually 20%, but a 28% top rate applies to gains from the disposition of collectibles held for more than one year. "Collectibles" means art, rugs, antiques, metals, gems, stamps, coins, and alcoholic beverages. IRC Sec. 1(h)(6)(A) , 408(m). ♦♦ Interest expense incurred to carry investments is generally limited to net investment income. Net investment income excludes dividends and net capital gains unless you elect to include all or part of these in your investment income. IRC Sec. 163(d)(4)(B). Whether or not its advantageous for you to make this election may depend on the capital gains tax rate you'll pay. Consider whether the election will cause gain on collectibles subject to the 28% rate to be treated as ordinary income. ♦♦ Depreciation generally cannot be claimed on collectibles. This is because depreciation is not permitted on assets which are not adversely affected by the passage of time, or by your use. The most commonly ecluded assets are art, antiques, and collectibles. Rev. Rul. 68-232, 1968-1 CB 79. There are a few limited exceptions. Inexpensive paintings used as furniture might qualify for depreciation if you can demonstrate a limited life for them. Some courts have held that depreciation is permitted if the collectible sustains wear and tear in its use. An antique violin bow or bass viol as examples. Liddle v. Commr., 103 TC 285 (1994), aff'd, 65 F3d 329 (3d Cir. 1995).
■ Insurance: ♦♦ Determine what coverage is available. ♦♦ Obtain a replacement value appraisal for insurance purposes.
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