Playing the Art Market: Citibank Guides Collectors through Section 1031 of the Internal Revenue Code

Article excerpt

"Art is an investment" is a cliche for good reason. Because for some collectors, that Mark Rothko piece hanging above your desk is the creative equivalent of 10,000 shares of Apple stock purchased at the $6 mark. Just as other commodities are bought and sold, so too is art. When it comes to capital gains, the IRS sees no difference between the two. Unless you plan ahead!

Section 1031 of the Internal Revenue Code states that, "Whenever you sell business or investment property and you have a gain, you generally have to pay tax on the gain at the time of sale. IRC Section 1031 provides an exception and allows you to postpone paying tax on the gain if you reinvest the proceeds in similar property as part of a qualifying like-kind exchange."

Investment property? Gain? Like-kind exchange?

"The simplest way to explain Section 1031," says Citibank senior vice president David Gorenberg, "is to simply say that it's like playing Monopoly with real properties and real money, and not paying taxes when you sell Pennsylvania Avenue to buy Boardwalk.

"To make it simple in the art realm: I have one artist hanging on the wall of my office today. I'm redecorating and that art no longer fits with the decor, so I'm going to sell it. It's worth more than when I bought it, so that is a taxable event. If I do a 1031 exchange, not only can I roll the proceeds of the sale into the new art, but I can not pay the taxes and use all of the proceeds as opposed to the sale price minus capital gains tax."

Complicated? Sure. Which is where the Citibank 1031 Exchange team comes in, and as early on in the process as possible. "They cannot hire us after they've sold the first piece, because the IRS regulation requires that we be involved before they touch cash," says Gorenberg.

It's also important to note that Section 1031 was established--and only applies to--business properties and investments. Which means that Picasso hanging in your beach house won't cut it. "When you look at the vast majority of these transactions, they tend to be real estate-focused," says Gorenberg. …