Just saw a tiktok saying that art investment tax loopholes are very easy and common.
I don’t understand how it can benefit the rich people doing it though.
Say they buy a painting at 10,000£, then donate it to charity a year later. They are now down 10k and also don’t have a painting. How does declaring that as a charitable donation change anything?
In: 88
When you donate to charity, you can get some of what you donated deducted from what you owe in taxes. If you buy an art piece and then later an appraiser says it’s worth a million dollars and you donate that art piece to charity, you get to say you donated a million dollars regardlesswhat you paid for it. The thing is art is subjective and appraisers can have a lot of leeway in how much they appraise an art piece for. So it would be really easy to get away with corrupting appraisers to save money on taxes.
To encourage donations to charity, when calculating your taxable income for a year (which is total income minus expenses related to your work) many governments allow you to count charitable donations as part of your allowed expenses.
So if you had an income of $1 million and made a $100k donation to charity, you could tell the government that your net income was only $900k, and pay taxes based on that. In effect, paying 10% less tax.
The thing is, art prices fluctuate a lot, so to get the current value of a painting you have to ask an art appraiser. Their opinions can be… influenced (not necessarily by outright bribery, but that’s one option). So you can buy a painting for 10k, hold onto it for a few years, and then get an appraiser to say that its value has risen to 100k.
So if you were going to pay 40% total tax on your $1 million income, that would be 400k. A saving of 10% is equivalent of 40k. You paid 10k for the painting, so you’re 30k up.
There are more factors that come into it, especially around how you make a convincing case that your 10k painting is actually worth 100k. But that’s the ELI5 answer.
There’s a lot of ways to achieve some similar result but the gist of one way is:
1. Find an up and coming artist
2. Buy loads of their art at their current rates as an up and coming artist. Say $1000 to 10,000/piece
3. After you have built a collection you start to overpay – you drive up the cost of their art. To $100,000-$1million a piece. They are now high profile and famous.
4. All the art you brought before you inflated the artists value is now able to be credibly valued at $100,000-$1million a piece, because that’s what is currently being paid for it, because you’re purposely paying that much. So your entire collection now appraises for much much more than you paid.
5. You can’t actually sell it for that though, because the value is only so high because you’re deliberately driving it up.
6. You then set up a charity that you control, called a Donor Advised Fund.
7. You donate your art at the inflated appraised value to the fund you control and claim the inflated value as a charitable tax deduction.
8. You can claim this deduction when you make the donation, rather than when the fund sells the piece. As you control the fund you control when the fund realizes the value of the art – so never have to actually sell it to try get the appraised value.
Thing is, the more you do this and the more openly you do this the less you look like a tax cheat and the more you look like a savvy patron of the arts with a knack for identifying rising stars, and then other collectors start to buy artists you’re “collecting” in stage 1-2 so will drive up the price for you to save you money on stage 3.
Bonus is also you get to do wealthy people stuff like hosting gallery openings and so on as a networking opportunity and status building event.
You are a rich person. You get £1 million a year. You have to pay £454,000 tax.
You buy a painting for £10,000 and donate it.
You are down £10k, but you can deduct it from your income. Your tax gets calculated as if you earned £990,000 instead of £1 million. This means for that year you only pay £450,000 tax. A saving of £4k.
You spent £10k on the painting, but get a £4k tax refund. You are down £6k, but the charity that got the painting is up the painting which is worth £10k.
In addition to the appraisal loophole, you can also loan art to a museum for free and write off the “fair value“ of the loan. This is an extremely common and lucrative method for people with large collections or art held for investment.
apparently “renting” a significant piece of art is expensive.
Guess it’s time for me to become an appraiser… for the sake of charity, of course. *wink*
In some cases they will pay little for a painting and then get it appraised for more than they bought it for and then donate it.
The scam version of this is a little dated.
These days the IRS has their own appraisers (AAS), they do look closely at big ticket donations that don’t seem to fit reasonably expectations.
It used to be much less regulated and monitored, but now there are more records requirements for art trading so it’s harder to lie about what you paid for a painting
These days, real estate is much more likely to be the tool for tax scams. Rich people buying expensive art are more often doing it for bragging rights or investment.
Ah, the art of tax breaks for the wealthy! Where “value” becomes as subjective as interpretive dance. #ArtfulDodgers
Is this the tiktok you saw it explains how it works and this guy owns his own gallery
@nobody.important000 Nolanart.com.au if you wanna do some shady stuff! #art #arttok #artist #paint #painting #sales #business #investment #artinvestment #artinvestor #tax #taxcut #evil #clay #ceramic
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