Minimizing Taxes on Art Collections by Sarah Gaymon, CPA
Posted on February 12, 2025
by
Sarah Gaymon
It has been said that a picture is worth a thousand words. However, the IRS has the final say when it comes to the valuation and tax treatment of paintings, sculptures and other works of art. Whether you own a few valuable pieces or amassed a significant art collection, you must consider how these assets can impact your taxable income today and the legacy you leave behind after your death.
Art is its Own Asset Class
The IRS considers art an alternative investment with a broad range of tax implications. For example, a collector’s sale of a piece held for more than a year is subject to a long-term capital gains tax of 31.8 percent (28 percent plus a 3.8 percent net investment income tax), compared to the 23.8 percent maximum tax on the sale of stocks and bonds. Short-term gains on the sale of artwork held for less than a year can be as high as 40.8 percent, depending on your income tax bracket.
The art you own at the time of your death becomes part of your taxable estate, subject to a 40 percent federal estate tax when the estate’s total value exceeds the federal exemption amount, which is scheduled to be reduced by half in 2026. An additional tax may also apply if you are domiciled in any of the 12 states and the District of Columbia that impose an estate or inheritance tax at the state level.
Determining art’s value is required to record the proper gain from a sale. Appraisals must be conducted by experienced professionals to avoid any specter of IRS scrutiny. Historically, art valuation disputes with the IRS have come from market volatility, debates over authenticity, title issues that cloud ownership, and valuation discounts based on sales of entire art collections rather than one piece at a time.
Minimizing Taxes on Art Collections
Whether you build your art collection for enjoyment or investment purposes, you must have a plan for how the purchase, holding and eventual disposition of those assets will impact your legacy and the current and future tax liabilities of yourself and your heirs. All too often, individuals will revel in the pleasures of acquiring artwork during their lifetimes, paying little attention to what will become of those treasures after they pass away. Will heirs have the same attraction to the pieces in your collection? Is there any sentimental value to the art that could spur infighting among heirs?
Without advance planning, your art collection will become a part of your taxable estate. The potential good news is that your heirs will receive a step-up in the property’s tax basis to the fair market value on the date of your death. They may then turn around and sell those works at fair market value, reducing or, in some cases, avoiding exposure to income and capital gain tax on the sales proceeds. Alternatively, there are other strategies you may employ to yield preferential tax treatment on the disposition of your art collection based on your unique circumstances. Examples include:
- Selling the art to a grantor trust and allowing its value to appreciate outside of your taxable estate.
- Selling less-favorable pieces now to avoid a future liquidity problem for your estate (and heirs). Depending on your basis in the artwork, the selling price, where you live or where the collection resides, this may require you to recognize a gain on the sale in the current year that could result in immediate federal income tax liabilities as well as state-level tax obligations.
- Transferring pieces in your collection to a charitable remainder trust (CRT) or charitable lead trust (CLT).
- Donating appreciated art directly to a 501(c)(3) charity to receive an immediate tax deduction of up to 30 percent of adjusted gross income (AGI).
- Donating works to a self-funded donor-advised fund (DAF) or a private foundation (PF) to receive a charitable deduction and potentially avoid capital gains tax on its appreciation.
- Gifting artwork to a spouse to take advantage of an unlimited marital exemption or making gifts to family members to use up annual gift tax exclusions or a lifetime exclusion equal to the federal estate tax exemption.
- Making permanent loans of artwork to museums.
- Establishing your own private museum and keeping your collection intact. This planning strategy is most appropriate for individuals with extensive collections who have the means to support the high annual fixed costs of managing and maintaining a private museum.
While you can mitigate the tax implications of a highly valued art collection, it is important to plan carefully under the guidance of experienced professionals to ensure maximum tax efficiency and fulfillment of your wishes for your treasured pieces.
About the Author: Sarah Gaymon, CPA, is a director of Tax Services with Berkowitz Pollack Brant Advisors + CPAs, where she works with entrepreneurs and high-net-worth families to plan for tax-efficient wealth preservation and multi-generational wealth transfers. She can be reached at the CPA firm’s West Palm Beach, Fla., office at (561) 361-2050 or info@bpbcpa.com.
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