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Imagine Art Collecting Without the Taxes

FALL 2018 | TRUSTS AND ESTATES JOURNAL

Michael S. Schwartz, CFP®, AEP®

Chief Executive Officer
Wealth Management Advisor
MAGNUS FINANCIAL GROUP LLC

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Qualified experts have the ability to apply more than one planning approach

Art and science are branches of the same tree. In the words of Albert Einstein, “Logic will get you from A to B. Imagination will take you everywhere.” Art lovers appreciate creations of beauty, expressions of imagination, and a shared glimpse of the artist’s spirit. Appreciation is one thing. But if you want to move from point A to point B – art lover to art collector – there is a science to getting you there.

In 2013, actress Baby Jane Holzer, an avid art collector and one of Andy Warhol’s film superstars, attempted to sell two of her appreciated paintings and parlay the sale proceeds into two new paintings. She could either sell directly to the end buyer and be subject to tax – or use a little imagination. If Holzer sold the paintings without any tax planning, she would have been subject to a hefty 28 percent capital gains tax. Instead, she used her imagination and employed a different kind of art form to the sale. Holzer hired a qualified intermediary to facilitate a planning approach referred to as a “like-kind exchange” using Section 1031 of the Internal Revenue Code. By using this code provision properly, she could have effectively transformed one investment into another without triggering a capital gains tax because there would have been no constructive receipt of the sales proceeds. For Holzer, a legal technicality – a bounced check from the intermediary – prevented her exchange from being completed and the associated tax deferral from being realized, according to Courthouse News Service. The intermediary called it a mistake. The court called it a lawsuit.

Unfortunately, the Tax Cuts and Jobs Act of 2017 made 1031 like-kind exchanges a thing of the past for sellers of art and collectibles. While logic behind the reform will not make it easier to get from point A to point B, there is still a science to achieving favorable tax results.

Financial engineering can be affected with proper planning, providing tax-deferral for sellers of art and collectibles. There are a series of other pre-sale disposition planning strategies – some well-known and others not so well known – that can mimic the tax advantages of a like-kind exchange and some can even reduce or eliminate the tax.

A 1031 like-kind exchange, while good in its application and its benefits, came with a plethora of conditions that made it not only arduous for sellers but an inferior planning technique to those available at that time and today.

When selling art and collectibles, it is a good idea to seek out financial advisors who have the specialized expertise to structure the sale of highly appreciated assets. Qualified experts should have the ability to apply more than one planning approach, which can reduce the tax burden that so often plagues avid collectors.

In the next few issues, we will explore a variety of the planning techniques alluded to in this piece. With a qualified financial advisor in your corner, your love of art can be tied to the pursuit of profits. Unlike with Holzer, it can help assure that you successfully get from point A to point B. Imagine the difference with proper planning, and it will take you everywhere.

ABOUT MAGNUS FINANCIAL GROUP, LLC

Guest Contributors
Michael Schwartz, CFP®, AEP®; Michael Brown, Ron Deutsch, CFA®, MBA; Brian Flynn; Paul Hoerrner Jr., CFP®; Michael Tanney; and Travis Nelson, CFP®
at Magnus Financial Group LLC.
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