Artwork and collectibles held for investment or in a business and minimal personal use represent 1031 exchange properties eligible for tax deferral. When sold the personal property triggers a 28% capital gains tax versus 15% (given held for one year and a day) for real property that can be deferred following 1031 exchange rules. Using 1031 exchanges, individuals with private collections and corporate collectors can effectively defer the capital gains tax when repositioning their collections to meet the desired image or corporate direction.
Proper Intent
Artwork and collectibles are eligible for 1031 exchanges if held for investment or in a business or trade. Though the artwork and collectibles are acquired for personal enjoyment, appreciation can be another reason for their purchase. Wrightsman v. U.S., 192 Ct. Cl. 722 (1970) is a Court case illustrating how to hold artwork or collectibles with the proper 1031 exchange intent of investment versus personal use. By maintaining detailed catalogs, invoices, expense records, the Wrightsmans maintained their artwork much like a business. Their intent to hold the artwork for investment was supported by ledgers of regular appraisals and insurance. For the individual collector, think and act as if you are a museum by keeping ledgers recording sales and acquisition details like original purchase and sales price and expense records itemizing associated expenses such as appraisals and insurance.
Like Kind Exchange
The like kind exchange requirement means the replacement property must be like kind or same character rather than the same grade or quality. There is currently no guidance offered by previous Revenue Procedures or Court rulings defining a like kind standard for artwork and collectibles. Though Private Letter Rulings (PLRs) are the Service’s response to a specific set of facts, they provide insight and are not to be used as the de facto standard.
In PLR 8127089 dated April 10, 1981, lithographs were destroyed by fire. Claiming exclusion of the gain under Section 1033, the Taxpayer used insurance proceeds to acquire a new portfolio consisting of 63% lithographs and 37% of artistic media. Section 1033 of the Internal Revenue Code uses a narrower standard than Section 1031 requiring the replacement property be “similar or related in service or use” to the property destroyed. The Service stated the artwork in the same medium was similar or related in service or use permitting the Taxpayer to defer the portion related to the lithographs.
Artwork and Collectibles of the Same Medium or Like Kind
- Sculpture for sculpture
- Oil painting for oil painting
- Water color for water color
- Lithograph for lithograph
- Coins for coins
- Mexican gold coins for Austrian gold coins
- Gold bullion for gold Canadian maple leaf coins
- Violin for violin or instrument sharing same NAICS code
- Stamp for stamp
- Alcoholic beverage for alcoholic beverage
- Gem for gem
- Antique for antique
- Fishing permits, regardless of species or fishery location; and
- Major league sports contracts for major league sports contracts.
The above represent like kind 1031 exchange properties or replacement property consistent with the like kind standard. Personal property used predominantly in the United States and personal property used predominantly outside the United States is not considered like kind.
Artwork and collectible 1031 exchanges follow the same 1031 guidelines as real property. Private sales require the Accommodator receive an assignment of the rights for each contract and the Buyer signs a Notice of Assignment. Auction sales require the Accommodator be a party to the consignment agreement to sell the artwork or the bid for acquiring the replacement artwork or collectible.