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What Aspiring Collectors Should Know About Investing in Art

·6 min read

Investing is a calculated, logical, even impassive process. In contrast, an emotional attraction compels art collectors to acquire an artwork. An irresistible allure drives transactions.

In addition to the inherent emotional component to buying and owning art, countless people maintain collections as an aspect of their overarching investment strategy. While the complexities of investing in art as an alternative asset have been widely studied over the past decade, the nuanced responsibilities of owning art objects remain veiled in confusion.

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I have connected with experts on three subjects that often intimidate collectors: tax, consignment agreements and fine art insurance. By providing logistical guidance here, collectors will walk away with the knowledge to make educated, credible decisions.

Understanding Taxes

Within the United States, art is taxable. Three types of tax are essential for collectors to grasp: sales tax, use tax and capital gains tax.

“Sales tax and use tax are kind of a yin and yang—they’re supposed to work together,” Pamela L. Grutman, a tax lawyer at the boutique law firm Olsoff|Cahill|Cossu LLP, told me in an interview.

As Grutman, who works with clients in New York’s art and culture space, explained, sales tax applies to art purchases as it would to any other commodity. If you walk into a gallery and buy an artwork, the vendor will apply and charge an additional percentage of the sale as tax.

“Sales tax is usually destination-based,” Grutman said. “So if you purchase a work in New York and ask the gallery to ship it to your Delaware storage unit, you wouldn’t need to pay sales tax because Delaware doesn’t charge it.”

What, then, prevents a Manhattan-based collector from shipping an artwork to Delaware and then personally driving the work back to New York? Use tax.

“Use tax is the counterpoint to sales tax,” Grutman explained. “Whether you bring that art piece back a month or 10 years later, you’re subject to use tax if you have a residence in that state. You’ll need to self-report the use on your taxes.”

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Grutman notes that (logically) collectors will need to pay taxes when they sell artwork, too.

“If you’re a collector and you’ve held that artwork for more than a year, it will be treated as a capital asset. After a sale, you’ll subtract the amount you initially paid for the piece, from your proceeds and apply the capital gains tax rate—which is currently 28 percent for artwork—to the difference.”

Collectors should track the total costs relating to an artwork, in order to accurately calculate their tax burden.

Writing Consignment Agreements

Entrusting an artwork to a dealer, gallery or auction house to sell is called consignment. Before transferring the piece, collectors should set terms for the arrangement via a consignment agreement.

“It’s the money that matters most,” said Paul Cossu, a lawyer who specializes in art law at Olsoff|Cahill|Cossu. “You want to know what the split of the sales proceeds between you and the seller is. Then, allocation of costs—who’s paying for the shipping and insurance, are those expenses coming off the top of the sale, and is the burden equally split or given to one person?”

“Another point to consider is time,” Cossu continued. “How long is the agreement for? If you’re a collector working with a gallery, you probably want something within the 30- to 90-day range so you can consign elsewhere if you don’t get a sale.”

In addition to a written agreement, Cossu suggests securing the consignment through a UCC financial statement with the Secretary of State.

“In New York, it costs about $20 to file and identifies the work’s consignor, the asset and whatever gallery or auction house you signed it to,” he said. “It’s a public notice to everyone that the artwork is not owned by the gallery, it’s owned by you. If the gallery goes bankrupt and the bank claims its assets, they can’t appropriate your property.”

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Such records are public. And Cossu noted that collectors can maintain confidentiality by hiring a lawyer to file it on their behalf.

“It’s an important step to protect your assets,” he concluded.

Handling Fine Art Insurance

“No one wants to talk about insurance until they have a claim,” Sarah K. Johnson joked during our conversation. “Then suddenly it’s the most important thing that they have—if it’s done properly.” Unfortunately, many art collectors don’t have sufficient coverage.

As Johnson, an insurance broker with VF Global Brokerage LLC, a boutique brokerage that specializes in art, explained, “Many people think they have coverage under their homeowner’s policy. But those usually offer very limited coverage.”

If you don’t have fine art insurance—or even if you do, but aren’t insured for the correct value—you could lose a great deal. According to Johnson, getting the wrong policy is a mistake even veteran art investors can make.

“I’ve come across some very savvy collectors who thought they were insured for retail replacement value when they weren’t and received half of what they expected,” she said. “Depending on your collection, not having the right valuation could leave you severely underinsured in the event of a loss.”

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But most of Johnson’s claims are surrounding restoration and maintenance, not replacement.

“Accidental damage caused during transit or installation is far more common than total loss,” she said. “Those are partial-loss claims, so rather than replace the piece, we connect the owner with restoration specialists.”

Brokers like Johnson also help clients preserve the intrinsic and financial value of the piece through risk mitigation. While insurers generally only need formal appraisals every three to five years to provide coverage, Johnson suggests that collectors check for damage annually.

“Collectors will wax their cars but not think about how exposed the multimillion dollar sculpture in their front yard is to the elements,” she told me. “The patina, the metal, the materials—they need to be maintained by specialists.”

This kind of proactivity reduces insurance premiums, maintains a work’s valuation, and most importantly, preserves the art. On this note, Johnson offers a poignant perspective for aspiring and current art investors.

“People who collect artwork are cultural custodians,” Johnson said. “You hope your collection will last across generations. But if you don’t take care of it now, it will be lost to the future. It’s your responsibility to make sure you’re acting as a steward of art, as well as an investor.”

Heather Flow began her career at MoMA PS1 and later founded Flow Advisory, a collecting firm that functions as a type of collecting laboratory, primed in generation of artists examining the onset of digital changes in the mid-2000s. Through this scholarship, Flow Advisory collaborates with clients to create inventive, pliable, and dynamic private collections, which preserve collective history. Flow has been featured in the Wall Street Journal, Forbes, and Artspace.

The post What Aspiring Collectors Should Know About Investing in Art appeared first on Worth.