Coronavirus Operations Memo: Click Here | Magnus documents: Form ADV | Form CRS | Privacy Policy

Imagine Art Collecting Without the Taxes

- October 1, 2018

Michael S. Schwartz, CFP®, AEP®

Chief Executive Officer
Wealth Management Advisor
MAGNUS FINANCIAL GROUP LLC

View on HA.com

Qualified experts have the ability to apply more than one planning approach

Art and science are branches of the same tree. In the words of Albert Einstein, “Logic will get you from A to B. Imagination will take you everywhere.” Art lovers appreciate creations of beauty, expressions of imagination, and a shared glimpse of the artist’s spirit. Appreciation is one thing. But if you want to move from point A to point B – art lover to art collector – there is a science to getting you there.

In 2013, actress Baby Jane Holzer, an avid art collector and one of Andy Warhol’s film superstars, attempted to sell two of her appreciated paintings and parlay the sale proceeds into two new paintings. She could either sell directly to the end buyer and be subject to tax – or use a little imagination. If Holzer sold the paintings without any tax planning, she would have been subject to a hefty 28 percent capital gains tax. Instead, she used her imagination and employed a different kind of art form to the sale. Holzer hired a qualified intermediary to facilitate a planning approach referred to as a “like-kind exchange” using Section 1031 of the Internal Revenue Code. By using this code provision properly, she could have effectively transformed one investment into another without triggering a capital gains tax because there would have been no constructive receipt of the sales proceeds. For Holzer, a legal technicality – a bounced check from the intermediary – prevented her exchange from being completed and the associated tax deferral from being realized, according to Courthouse News Service. The intermediary called it a mistake. The court called it a lawsuit.

Unfortunately, the Tax Cuts and Jobs Act of 2017 made 1031 like-kind exchanges a thing of the past for sellers of art and collectibles. While logic behind the reform will not make it easier to get from point A to point B, there is still a science to achieving favorable tax results.

Financial engineering can be affected with proper planning, providing tax-deferral for sellers of art and collectibles. There are a series of other pre-sale disposition planning strategies – some well-known and others not so well known – that can mimic the tax advantages of a like-kind exchange and some can even reduce or eliminate the tax.

A 1031 like-kind exchange, while good in its application and its benefits, came with a plethora of conditions that made it not only arduous for sellers but an inferior planning technique to those available at that time and today.

When selling art and collectibles, it is a good idea to seek out financial advisors who have the specialized expertise to structure the sale of highly appreciated assets. Qualified experts should have the ability to apply more than one planning approach, which can reduce the tax burden that so often plagues avid collectors.

In the next few issues, we will explore a variety of the planning techniques alluded to in this piece. With a qualified financial advisor in your corner, your love of art can be tied to the pursuit of profits. Unlike with Holzer, it can help assure that you successfully get from point A to point B. Imagine the difference with proper planning, and it will take you everywhere.

ABOUT MAGNUS FINANCIAL GROUP, LLC

Guest Contributors
Michael Schwartz, CFP®, AEP®; Michael Brown, Ron Deutsch, CFA®, MBA; Brian Flynn; Paul Hoerrner Jr., CFP®; Michael Tanney; and Travis Nelson, CFP®
at Magnus Financial Group LLC.
MagnusFinancial.com | service@magnusfinancial.com | 800.339.1367

DISCLAIMER

Magnus Financial Group LLC (“Magnus”) did not produce and bears no responsibility for any part of this report whatsoever, including but not limited to any macroeconomic views, inaccuracies or any errors or omissions. Research and data used in the presentation have come from third-party sources that Magnus has not independently verified presentation and the opinions expressed are not by Magnus or its employees and are current only as of the time made and are subject to change without notice.

This report may include estimates, projections or other forward-looking statements, however, due to numerous factors, actual events may differ substantially from those presented. The graphs and tables making up this report have been based on unaudited, third-party data and performance information provided to us by one or more commercial databases. Except for the historical information contained in this report, certain matters are forward looking statements or projections that are dependent upon risks and uncertainties, including but not limited to factors and considerations such as general market volatility, global economic risk, geopolitical risk, currency risk and other country-specific factors, fiscal and monetary policy, the level of interest rates, security-specific risks, and historical market segment or sector performance relationships as they relate to the business and economic cycle.

Additionally, please be aware that past performance is not a guide to the future performance of any manager or strategy, and that the performance results and historical information provided displayed herein may have been adversely or favorably impacted by events and economic conditions that will not prevail in the future. Therefore, it should not be inferred that these results are indicative of the future performance of any strategy, index, fund, manager or group of managers. Index benchmarks contained in this report are provided so that performance can be compared with the performance of well-known and widely recognized indices. Index results assume the re-investment of all dividends and interest.

The information provided is not intended to be, and should not be construed as, investment, legal or tax advice nor should such information contained herein be construed as a recommendation or advice to purchase or sell any security, investment, or portfolio allocation. An investor should consult with their financial advisor to determine the appropriate investment strategies and investment vehicles. Investment decisions should be made based on the investor’s specific financial needs and objectives, goals, time horizon and risk tolerance. This presentation makes no implied or express recommendations concerning the way any client’s accounts should or would be handled, as appropriate investment decisions depend upon the client’s specific investment objectives.

Investment advisory services offered through Magnus; securities offered through third party custodial relationships. More information about Magnus can be found on its Form ADV at www.adviserinfo.sec.gov.

TERMS OF USE

This report is intended solely for the use of its recipient. There is a fee associated with the access to this report and the information and materials presented herein. Re-distribution or republication of this report and its contents are prohibited. Expert use is implied.

DEFINITIONS

Asset class performance was measured using the following benchmarks: U.S. Large Cap Stocks: S&P 500 TR Index; U.S. Small & Micro Cap: Russell 2000 TR Index; Intl Dev Large Cap Stocks: MSCI EAFE GR Index; Emerging & Frontier Market Stocks: MSCI Emerging Markets GR Index; U.S. Intermediate-Term Muni Bonds: Bloomberg Barclays 1-10 (1-12 Yr) Muni Bond TR Index; U.S. Intermediate-Term Bonds: Bloomberg Barclays U.S. Aggregate Bond TR Index; U.S. High Yield Bonds: Bloomberg Barclays U.S. Corporate High Yield TR Index; U.S. Bank Loans: S&P/LSTA U.S. Leveraged Loan Index; Intl Developed Bonds: Bloomberg Barclays Global Aggregate ex-U.S. Index; Emerging & Frontier Market Bonds: JPMorgan EMBI Global Diversified TR Index; U.S. REITs: MSCI U.S. REIT GR Index, Ex U.S. Real Estate Securities: S&P Global Ex-U.S. Property TR Index; Commodity Futures: Bloomberg Commodity TR Index; Midstream Energy: Alerian MLP TR Index; Gold: LBMA Gold Price, U.S. 60/40: 60% S&P 500 TR Index; 40% Bloomberg Barclays U.S. Aggregate Bond TR Index; Global 60/40: 60% MSCI ACWI GR Index; 40% Bloomberg Barclays Global Aggregate Bond TR Index.