Buyers and sellers of fine art and collectibles need to be aware that their official status in the eyes of the Internal Revenue Service can have a great effect on tax advantages or liabilities.
A collector is someone who buys primarily for personal enjoyment, not for the purpose of making a profit. The collector is considered an ultimate consumer and therefore has to pay sales tax on all purchases, unless they are shipped from an out-of state auction house or other vendor. No special tax deductions of any kind for the maintenance of the collection can be claimed. However, if a collector makes a charitable donation of an item that has appreciated greatly since the time of purchase, the full current Fair Market Value can be claimed.
Dealers are people in the business of buying and selling; they hold valid re-sale certificates and therefore do not pay sales tax when making purchases. Instead, they collect sales tax from their customers and remit it to the state. Ordinary and necessary expenses related the business can be deducted, but they cannot qualify for long-term capital gains tax of long-held appreciated property, the way collectors and investors may. Instead, that revenue is treated as ordinary income. If a dealer makes a charitable donation, the amount he could claim would only be his cost, not the Fair Market Value.
Investors are afforded some of the benefits of each of the other categories, and it can be a difficult status to establish. An investor puts money into fine art or collectibles for the purpose of producing income or profit; his interest in the property must be more "passive" than a collector's. Investors pay sales tax, but can also deduct related business expenses, such as insurance, storage, etc.
IRS scrutiny of the art and auction world has increased markedly over the last 25 years, so it behooves all buyers of art and collectibles to understand their tax status. Dealers and Investors should formalize their businesses through discreet bank accounts, appropriate licenses, and consistent buying and selling behavior. As always, seeking proper professional advice is critical.
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