transaction is primarily the operation of a dealer (business operations) or from an investment, the courts have examined various factors that include these areas of consideration:


• The purpose for which the property was acquired;


• The purpose for which it was held;


• The frequency, continuity, and substantiality of sales;


• The duration of ownership;


• The use of the proceeds from the sale of the property;


• The business of the taxpayer;


• The time and effort that the taxpayer devoted to sales activities relating to the asset in question by developing or improving that asset, soliciting customers, and advertising.


To distinguish an art investor from art collector, follow this definition: An art collector is someone who buys and sells works of art primarily for personal pleasure and is neither a dealer nor an investor; as such, he or she is defined as a collector ordinarily, and that person may be able to deduct expenses and losses.


Once you are classified as an investor you have the opportunity to accumulate deductions toward fine art investments and even do a 1031 exchange.


The 1031 exchange offers a 100% tax deferral, which allows you to augment, diversify, modify, or upgrade the art investment without the tax bite.


To be eligible for a tax-deferral, the relinquished and the replacement properties must be qualified “like- kind” properties and the transaction must be structured as a 1031 exchange. To meet the definition like-kind, the artwork sold must be of the same nature and character as that of the artwork being purchased. Grade and quality differences are not taken in consideration. So one painting can be exchanged for another but not for a sculpture, lithograph, or photograph.


Different artists, styles, mediums, ages and values are considered to be related to grade or quality so they do not interfere with like-kind definition.


Also this will allow one to exchange an abstract painting for an impressionist painting, an oil for a watercolor, an old masterpiece for a painting by an emerging contemporary artist. Likewise in an exchange on a sculpture for a sculpture, a photograph for a photograph, and so on can be done.


A “Qualified Intermediary” must be used to provide an exchange agreement and other necessary documentation required by tax rules. This agent will hold funds from each exchange in a segregated bank account set up for the benefit of the named taxpayer.


The investor can sell or buy from different parties, galleries, or auctions, can take up to 45 days to identify potential replacement artwork, and can take up to 180 days to actually complete the exchange with the purchase of the new artwork.


"An art collection needs to be kept in good condition which may include framing, reframing, lighting, air conditioning, humidity controls, cleaning and other maintenance, security, and insurance."


Court cases relevant to this article are Commissioner v. Groetzinger 1987, Thomas D. Drummond 1995, Charles Wrightsman 1970, Framework of Statues Sec 67, 68, 162, 212, 165, 183, 262 of IRS Code of 1986 as amended.


EXCLUSIVE COLLECTIONS GALLERIES 31


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