I found this video about how the Rich use art to cut their taxes extremely interesting and in many ways sad. This should infuriate all those people that wring their hands when a certain News Channel tells them stories of poor people buying steak with SNAP money but it never does.
Can you summarize? I thought the gains on art sales were taxed extra-heavily at 28%.
Long story short, buy a painting at $1M, wait a year+, get it appraised at $5M, donate it to a museum, take a $5M tax deduction off your income.
The appraisal is the trick. The world of such investment art is tightly controlled by a few galleries and auction houses. It’s in their best interests to hype up the value of certain works. So if one painting by Joe Blow is sold for $5M all the other works by Joe Blow go up accordingly. It doesn’t take much manipulation to run this game.
A lot of backscratching goes on. Galleries help investors pick works who then buy from them and then in turn help get the works appraised for higher values.
(And this video states that gain on art sales are taxed as capital gains, which are low.)
BTW: One of my guides to when the economy is overheating is when the prices on paintings skyrocket. The rich are getting really, really, richer and think it’s going to keep going. This is what’s happening now. Fall is coming.
I’ve never heard it was different than any other capital gain.
Sarah Urist aka Mrs John Green (of John Green of The Fault in Our Stars and Vlogbrothers fame makes excellent videos.
It’s 28% versus the usual 20%.
So, the issue is not the tax rate,
and the issue is not the fact that there’s a credit,
the issue is simple old-fashioned corruption.
Steve Wynn got the Nevada legislature to re-write the state tax code with regards to art; Mr. Wynn was the sole beneficiary of the re-write for many years.
So…spend $1m so that you can then donate it for $5m, and save…~$2m (39.6% of $5m) - a net of $1m? Instead of spending $1m, selling for $5m, and paying 20% on the $4m gain for a net of $2.2m?
I guess if the appraisal system is corrupt, and you’d never get that $5m at auction, it works. But if that’s the case, why isn’t the IRS all over this?
I think you’re correct in principle. (Except that it’s 28% tax, and the gain from sale actually works out to $2.88 million – I think you subtracted the initial $1 million twice). It’s hard to see why the owner of a legitimately-appreciated artwork benefits from donation more than from sale, even with the stepped-up donation.
More broadly, if the appreciated value of the artwork is legitimate, why shouldn’t the owner be able to value his or her donation at that amount for deduction purposes? Certainly, when someone donates items that depreciate (like cars or household goods), one has to value the donation at the current, depreciated price and not at what one paid for it. Why should the donation of an appreciated item be different?
The reason is that something is really only worth what someone pays for it. Being appraised at $5 million doesn’t mean you can sell it for that, it doesn’t mean that there is a buyer who is actually willing to buy it for that.
Sure, if you could buy at 1 and sell at 5, that’s a better profit than donating. But if no one is actually willing to pay more than 2 for it, then donating it with its appraised value of 5 is a gain. The museum doesn’t mind, because it make it look more prestigious to have more expensive art in its galleries.
This was a giant scam in Canada a few years ago. A third-party would “sell” you a piece of art for say $1000 and then turn around and donate it in your behalf to a cooperating charity for a $10,000 tax receipt. You never even took possession of the artwork.
Needless to say, once the Canada Revenue Agency caught wind of this they reassessed thousands of people that took part in this scam.
This reminds me that I worked on a client who gave us a very long list of items from an estate they had appraised for donation, and the numbers looked fairly reasonable given the descriptions; it was a huge mish mash of different things so even though it was over $5k, I felt it could be all put on the “under $5k” page as the items were not similar enough to be grouped together as the “over $5k” page states. Then I get told we just got a fax from them with another set of items to add to it. I take a look, and it’s the exact same list of items, now with all values approximately double. In addition, the appraiser’s summary was addressed to the client’s college-aged daughter. Other than those two things, it was exactly the same. Now the value is a very round number, a multiple of $1k, whereas before it had stray dollars and cents. Now I don’t work directly with clients, so I don’t know what’s going on here, but something screwy definitely went on with respect to the valuation of these items. Whether it’s fine art or used household goods, it’s very difficult to put a price to a lot of items that are regularly bought and sold on the secondary market. You might be able to know in general what used clothes go for in thrift stores, but some random figurine you bought for way more than anyone would ever pay unless they were totally enamored with it? Who knows what its “fair market value” is? I suspect a lot of their fair market values would be essentially scrap value, as people in general would have any use at all for it. I was just mentioning tonight when seeing silent auction items that included signed pictures of actors - I wondered how the hell they came up with the supposed values. I see something like that as so worthless I would pay someone to take it away from me if that was the only way to get rid of it.
I would not be surprised if some appraisers are told exactly what the results will be, if not initially, after they come back with the first appraisal.
As noted, the appraisal value is supposed to be far higher than what it would sell for at auction.
How does the IRS prove that the appraisal is overvalued? The “people in the know” on the prices of these pieces are part of the appraisal inflation scheme. Where is the IRS going to find outside experts whose testimony would be persuasive that the $1M artwork is still worth only $1M???
One person’s opinion vs. another person’s opinion is not a winning case in court.
I think the taxpayer has the burden of proof to establish a deduction, though.
I thought this thread was going to be about storing art in “freeports” where you don’t pay tax because your goods are still technically in transit. Planet Money did a podcast on the subject in February.
Movies and popular culture in general do us a disservice by portraying the IRS as a cut-throat, super efficient organization. Same with internal affairs in police departments. It gives the public a perception that less wrongdoing goes on than actually does by portraying the watchdogs as far more effective than they are.
The IRS has been underfunded and hamstrung for years and has had to drop a lot of its enforcement and investigation of relatively easy sorts of fraud, so things that are harder to prove definitely go by the wayside. Can you guess who might be interested in, and push for, a highly weakened IRS investigative and enforcement arm?
Anyone who doesn’t like paying taxes?
If you don’t like paying taxes, there are plenty of things you can do.
You can open a business, and write off expenses. You can donate to charities or foundations, and write those off.
You can even have a kid or two, and get deductions for that. You could have high medical bills, and write off some of that. Take out some student loans, and deduct the interests.
You can lobby congress to lower your taxes, or open up new loopholes.
If none of those are interesting, you can just make less money, then you pay less taxes.
No, those who want a weaker IRS are not people who just don’t like paying taxes, it is people who want to pay less taxes than they are legally obligated to based on their income and expenditures.
Generally, when you sell property, you have to recognize capital gains on that property. Economically, donating appreciated property to a charity is equal to selling the property and then donating the proceeds to a charity. For tax purposes these two actions are radically different. Why should they be treated differently?
There are at least two ways to mitigate this problem. First, you could allow people to deduct only their basis in the property. If they bought a painting for $1 million and did nothing to increase the property’s tax basis, they could donate it and get a $1 million deduction. By donating appreciated property, the charity gets the benefit of the $5 million donation and the owner gets a deduction equal to up to 37% of the basis ($0.37 million) while avoiding the capital gains taxes.
Alternatively, we could allow the deduction of the fair market value of the item only if the person first recognized the capital gain on the item. So, the person would buy the item at $1 million, wait until it appreciated to $5 million, recognize the capital gains of $4 million (paying taxes at the applicable 28% capital gains tax rate = $1.12 million), and then use the stepped up basis ($5 million) as the value for donation purposes, reducing the donor’s income taxes by up to today’s max marginal bracket (37%, or $1.85 million). On net, the person is saving about $0.73 million in taxes by making the donation. This isn’t too bad. The general formula for the tax savings on this method is (Tax Savings = (marginal tax bracket x tax basis) + (unrealized capital gain x (marginal tax bracket - capital gains tax rate)).
Either of these methods reduces the benefit of the tax dodge. Of course, it also would reduce donations of appreciated property to charities. so all the charities and rich donors would be opposed.