Wednesday, 8 November 2017

As an art lover, you are always looking for new pieces to add to your collection, but lately you're running out of walls.

You've been thinking about purging a few paintings and sculptures from your collection, but you aren't sure if you should sell them or donate them to a museum or local university.

What should you do?

This is a huge decision with emotional and financial implications. It should be taken seriously, and collectors are smart to create what Laurence Zale, a New York City-based independent art consultant, calls a “triangular relationship" with multiple experts to move forward.

“You need a relationship with an independent visual arts adviser to work hand-in-glove with your financial adviser and legal counsel to create a plan that takes into consideration the many variables to make the right decision for you," he says.

In 2013, BBVA Compass began a partnership with Christie's to help its customers with decisions involving "treasure assets" such as art. According to a Deloitte report, wealthy individuals hold approximately 9.6 percent of their total net worth in assets such as fine art, so it is incredibly important to get the best possible advice. The partnership gives BBVA Compass clients access to experts in more than 40 categories of collectable assets.

Selling valuable art

Capital gains taxes come into play when selling, says Zale. Here's an example: Let's say you purchased a collection for $100,000, but today it is appraised at $1 million. “That means you will have $900,000 in equity or appreciation," he says. “If you wanted to sell it outright, you'd be subject to capital gains tax on that entire $900,000."

Add to that tax on the 15-20 percent fee taken from an auction house and between $1,000 - $3,000 for the appraisal, and you are looking at a large chunk of change. That is why some people try to sell off only a portion so as not to get strapped with such a significant tax burden.

Selling comes with many other financial considerations, so it is best to consult your tax and financial advisors before leaping into this decision. It also pays to run the numbers to determine if it will be more financially advantageous to sell or donate.

Donating part of your art collection

Donating is a completely different story. While you can deduct up to 30 percent of your adjusted gross income in a calendar year, it is important to look at what that means when you consider how much you want to donate. If your $100,000 collection is now worth $1 million and you want to donate it all and deduct it, you'd have to make quite a bit of money to do so.

“So instead, what a lot of people do is donate just part of their collection," he says. “Let's say you kept three-fourths of your collection and donated $250,000 worth of it. The IRS allows a five-year carryover period for single deductions, so if you were making $200,000 per year, you could deduct $60,000 per year for five years to get the complete deduction." This is just an example, and can be expanded to millions of dollars worth of deductions, depending on your income bracket.

If someone wants to donate a collection, Zale suggests hiring an independent consultant to contact museums or universities on the owner's behalf.

Should potential donors contact museums/universities themselves?

“No, not any more than people who aren't trained in law should defend themselves," says Zale. “Museums will often reject that kind of solicitation simply because they might want one or two of your objects, but not the whole collection. It is really important to go through an independent consultant for this type of thing.".

Financial vs. emotional

Making the decision to sell or donate your art is a very personal one. Ask yourself: Is your artwork considered a financial investment that may offer excellent returns in the future? Or do you collect art for the emotional attachment you have to each piece?

The financial advantages and disadvantages of selling vs. donating rely heavily on your income bracket. Some people will decide to choose one over the other for the monetary benefits, while others will focus more on emotional considerations.

“I don't think one is better than the other, but I have seen that people who donate experience somewhat of an emotional or spiritual satisfaction knowing where their art pieces will go," Zale says. “You can do a lot with a donation. Maybe you want to endow a professor to teach at a university or include in the donation the guarantee of a lecture series on your collection. You don't have as much control when you sell your art, but if you decide to donate, you can still have access and it can stay part of your life for years to come."

The content provided is for informational purposes only. Neither BBVA Compass, nor any of its affiliates, is providing legal, tax, or financial advice. You should consult your legal, tax, or financial advisor about your personal situation. Opinions expressed are those of the author(s) and do not necessarily represent the opinions of BBVA Compass or any of its affiliates. 

Securities and Insurance Products:
ARE NOT DEPOSITS ARE NOT FDIC INSURED
ARE NOT BANK GUARANTEED MAY LOSE VALUE
ARE NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY