Art appreciation goes beyond the aesthetic. If you truly appreciate art, you may spend significant amounts of money to support that passion. Purchasing art can include expenses for transportation, storage, display and insurance, as well as fees for appraisals, conservation and restoration.
Conscientious stewards of financial resources look for ways to offset such expenses with tax rules. Fortunately for art lovers, there are some federal tax deductions that apply to art purchases. The types of deductions available depend on whether the Internal Revenue Service (IRS) classifies you as an artist, dealer, investor or collector.
In general, artists, dealers and investors can claim any expenses related to creating, acquiring, preserving or transporting art if they are incurred as normal and ordinary business expenses, or if they are incurred in the production of income. While collectors are not able to take these types of deductions, they do get tax benefits when selling or giving away their collections.
Here's how the IRS defines each group:
Although artists, dealers and investors can deduct business expenses related to producing and selling art works, they do pay taxes on the sales of their art. The art sold by artists and dealers is considered inventory, which means sales are taxed generally at rates of up to the highest ordinary income tax rate, which is currently 39.6%.
When investors sell works of art, they are acquiring gains on their investments, similar to selling stock for a profit. As such, those sales are subject to the capital gains tax rate, which is 20% for taxpayers in the highest tax bracket.
The long-term capital gain rate for collectibles, which may apply to both investors and collectors, is 28%. In addition, the Patient Protection and Affordable Care Act of 2010 added a 3.8% surtax on net investment income, which includes collectibles, for certain high income investors and collectors. Therefore, investors and collectors in the highest income tax bracket could pay a tax of up to 31.8% on the sale of collectibles.
Rather than assuming you'll be able to write-off the money you spend on art, take the time to figure out how your interest in art will be classified. By understanding the nuances associated with acquiring art, you can make better, more informed spending decisions.
1. All tax rates as of May 2016.
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