Art collectors getting big tax breaks
NEW YORK — Introduced in the 1920s to ease the tax burden of farmers who wanted to swap property, it soon became a tool for real estate investors flipping, say, office buildings for shopping malls.
Now, this little-known provision in the tax code, known as a like-kind exchange, has become a popular tactic for a new niche of investors: buyers of high-end art who want to put off — and sometimes completely avoid — taxes when upgrading their Diebenkorns for Rothkos.
“You can defer millions of dollars of taxes,” said Josh Baer, an art adviser.
The exchanges have become prevalent enough, and the cost to the government significant enough, that the Obama administration is seeking to eliminate them.
Lawyers are warning clients about what might happen and are facing anxious questions at conferences. Lawmakers are receiving calls and letters from the growing corps of like-kind exchange advisers in opposition to eliminating the exchanges.
Experts say use of the tax break has expanded in response to surging prices for art and the rising number of savvy investors who view paintings and sculptures as tradable commodities.
“I get calls all the time,” said Stan Freeman, president of Exchange Strategies in Campbell, Calif. “It’s a function of the marketplace right now.”
The maneuver allows an investor to delay paying the hefty 28 percent capital gains tax on sales of art and other collectibles, like stamps and coins, by pouring the profits from one work into the purchase of a similar one.
For example, someone who made $10 million on the sale of a Warhol would ordinarily owe the government $2.8 million. But with the exchange, the entire $10 million can be recycled into the purchase of, say, a Gerhard Richter. If the investor holds that painting for a decade or longer before selling, inflation eats away at the effective cost of the $2.8 million bill.
“You have access to the money saved for a number of years, until you decide to sell the asset,” said Thomas C. Danziger, a lawyer in Manhattan. “Or you may never pay capital gains if you die before the replacement work is sold.”
Investors can avoid all capital gains taxes by holding artwork bought with money from a prior sale until they die or by donating it to a museum, strategies that have made the tax break an attractive tool in estate planning.
Other investors sell and repurchase a series of works of escalating value without paying tax until an ultimate sale many years down the road.
Proponents say rechanneling profits into new investments, such as office buildings or sculptures, creates jobs. Critics say such exchanges were never intended to be a tax tool for wealthy art buyers.
“What we are seeing is yet another sophisticated federal tax avoidance scheme,” said Senator Ron Wyden of Oregon.
