Your art collection won't always hang on the walls of your home. Like other cherished belongings, you'll have to make a decision about where you want your collection to end up, either before or after you die.
If you choose to make charitable donations of artwork, you or your estate may qualify for associated tax deductions. But there are a number of decisions to make and things to consider in determining the tax benefits for which you qualify.
If you choose to transfer your art collection — or even individual works of art — to charity during your lifetime, you must follow several rules in order to claim a charitable income tax deduction:
The IRS does not allow donors to take a charitable income tax deduction for donations to non-U.S. charities. However, you may still be able to take a deduction for a donation to a U.S. charity even if they plan to use the donation in foreign countries. Make sure the charity you choose is a U.S.-based charity by asking for a copy of the charity's exemption letter from the IRS. You can also use the IRS's online search tool, the Exempt Organization Select Check.
If you plan to donate art to charity upon your death, there is no requirement that a charity be U.S.-based to receive an estate tax deduction.
Artwork must be considered long-term capital property to qualify for a tax deduction. So don't purchase a work of art with the intention of donating it so you can take a deduction that same year. In order to claim a work's current fair-market value as the value of the charitable deduction, you must have held the property for longer than one year.
This rule surprises many art collectors and investors. In order to claim a charitable income tax deduction equal to the work's current fair-market value, the IRS requires that the donated work be used by the charity in a way that is related to its mission. For example, art that is donated to a museum should be used in the museum's collection, and art that is donated to a university should be used to further the education of the students (displayed and used in art history lectures, for instance). If the intent from the beginning is for the charity to sell the work, the donation will not qualify for tax deduction under the related-use test.
When you decide to donate a work of art to charity, it's important to communicate with charity representatives to determine their plans for the artwork. It is not necessary that a charity hold the donated art in its collection forever; museums often sell works in order to raise funds to acquire other pieces. But if the artwork is valued at more than $5,000 and the charity disposes of the work within three years, the charity must report the disposition to both the IRS and the donor. You will still get an income tax charitable deduction equal to the fair market value of the art if the charity provides the IRS with an affidavit stating that it used the gifted property for its exempt purpose for a period of time, or that it became impractical to carry out this purpose. Otherwise, the deduction is limited to what you paid for the art (i.e., your cost basis).
The donor must obtain a qualified appraisal to qualify for a tax deduction for artworks worth more than $5,000. The Pension Protection Act of 2006 redefined the qualifications for acceptable appraisers, requiring that they have certifications, experience and have completed formal professional-level coursework.
Once an appraisal report has been acquired, a donor must attach IRS Form 8283 to his or her personal income tax return to claim the deduction. This form includes a summary of the appraisal, the signature of the appraiser, a signature from the charity acknowledging the gift, and a statement by the appraiser that he is qualified to perform this kind of appraisal. The full appraisal report must be attached to your income tax return for works of art valued at more than $20,000.
In addition to meeting all these criteria, you must also fit the classification of an art collector or investor as defined by the IRS in order to to claim a tax deduction. If you're an art dealer or an artist, you are not entitled to take deductions on charitable donations of artwork.
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