Volume 1, Issue 10, November 2009
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Dear
Friends,
As both dealers and collectors of fine art, we are uniquely aware of the many financial benefits that come with owning important works. In
the coming months we look forward to sharing some valuable art-related tax
insights with our clients and collectors. With the end of the year
rapidly approaching, this month's perspective explores two relevant tax
strategies for charitable giving.
Sincerely,
Joyce
and Kevin Anderson
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The Art in Taxation:
Charitable Contributions
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1) Outright donation to a qualified charity
Collectors who are not dealers can receive a tax deduction equal to the Fair Market Value
(see inset) of art donated to a qualified charity. In addition, the
excess of the fair market value of the art over its cost to the
collector does not have to be reported as income by the collector when
the art is donated.
If a collector donates art with a fair market value which is significantly higher than his or her cost, the decrease in income taxes resulting from the tax deduction for the donation may be greater than the amount of net cash realized from selling the art, after deducting selling expenses and income tax on the gain recognized. In this instance, it is more profitable for the collector to donate the art than to sell it.
This is also a good strategy for collectors who have incomplete records of the cost basis of art since the deduction is based on the fair value of the art and the cost basis becomes irrelevant.
2) Donation of an undivided portion of an interest
A popular way of executing this type of strategy is for a collector to donate to a museum the right to take possession of a work of art for a specified period each year. This works particularly well for a collector who spends a certain part of each year away from a residence which houses art. For example, a collector who spends winters in Florida and lives in New York the rest of the year could donate to a museum the right to take possession of a work of art from his New York residence during the winter. This commitment to the museum must be permanent. The collector would benefit from this arrangement as follows:
· The collector establishes goodwill and philanthropic capital with the museum and within the community
· The collector retains the art during the period he lives in his New York residence
· The collector receives an income tax deduction in the initial year of the donation equal to the fair market value of the art multiplied by the percentage of the year that the art is given to the museum.
· The collector doesn't have to worry about the maintenance of the art during his time away from the New York residence.
There are strict requirements that need to be met in order for a donation of an undivided portion of an interest in a work of art to be held valid under Federal law. Collectors should consult with a tax professional experienced in this area when entering into this type of arrangement.
By Kevin Yardumian, CPA, CFE
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