Capital gains tax remains the annual gotcha calculation in tax season. You invested wisely, watched your investment increase in value and when liquidated a taxpayer is liable for short and long term capital gains.
But what happens when a piece of art is sold and replaced with another piece of art? How does this impact your taxes?
I.R.S. Rule 1031 details what qualifies for a like-kind exchange regarding real estate or personal property.
How Does the Rule 1031 Work?
Simply stated a like kind exchange is selling one piece of art and purchasing another within a period of 180 days. One additional rule is that the replacement piece of art would need to be identified within the first 45 days. Art collectors are using I.R.S. Rule 1031 to avoid paying capital gains tax when an art investment is sold and then postponing the capital gains tax.
Stocks, bonds, securities are exempt from Section 1031.
Section 1031 does not apply to exchanges of inventory, stocks, bonds, notes, other securities or evidence of indebtedness, or certain other assets.
What Is A Like Kind 1031 Exchange?
Financial experts differ as to their opinions of what constitutes a like-kind exchange. Some maintain it would be apples to apples, oil painting to oil painting. Other maintain it could be an apples to oranges sale and purchase such as an oil painting sold is replaced by a water color painting.
Art Collector or Art Investor?
In order to qualify for the like kind exchange under I.R.S. Rule 1031, art must be purchased as an investment witht he intent of owning the art to ultimately create a profit. Purchasing art for your home would usually disqualify use of the rule. However, art collectors are not restricted to displaying purchased in their homes, but displaying a work of art in an area visited by clients or a home office could qualify for the rule.
To qualify for the like-kind exchange detailed financial records should be kept including: expenses, purchase price, appraisal, fees, insurance fees.
Real estate property has been the traditional focus of the like-kind exchange. Consumers would be wise to consult a tax professional if a like kind exchange is being considered by selling and purchasing pieces of art.