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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.
originally posted by: Cauliflower
a reply to: ImaFungi
There are a lot of starving artists out there on the streets barely able to survive.
What would have happened if Omar Khayyám had to sell pot to keep food on the table?
originally posted by: EternalSolace
a reply to: queenofswords
So it essentially boils down to legal tax evasion with a loophole provided by the IRS itself. Funny, someone can go to prison for evading paying even a ten dollar tax bill. Yet, a rich person can avoid paying millions in capital gains tax and get away with it legally.
Awesome how that works.
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.
Even Picasso bodies where breasts and ears switch places?