The art world reacted with apprehension to the news last week that a proposed change to US tax law could eliminate a popular tool for some investors. Under the Tax Cuts and Jobs Act passed by the US House of Representatives, the existing Section 1031—governing so-called “like-kind” exchanges used by investors to defer payment on capital gains—would be limited to “real property”, or real estate, from 1 January 2018, if passed by Congress in its current form.
Because capital gains on art are taxed at 28%, rather than the 20% rate on wealth, securities, and bonds, 1031 or like-kind exchanges have become a vehicle for buyers and sellers to trade artworks without incurring tax. An expert, if niche, specialty of art law and tax advisors has risen up to assist, with Deloitte, U.S. Trust, and boutique firms offering services cater to these blue-chip investors, managing and monitoring exchanges either individually or as part of a portfolio.
“The amount of 1031 exchanges has just skyrocketed, and it has become really a driver in the [art] market”, confirms Evan Beard, National Art Services Executive at U.S. Trust. “That going away will have a slightly negative impact on that segment over the long-term.” However, Beard believes the shift will be less dramatic than some may fear. “You’ll still have mega-collectors”, he says. “What may happen is that they may become slightly less dynamic in their art collecting. They may sell less on the way up.” Read more