How does buying stuff like paintings and then donating them benefit rich people with “tax breaks”?

Question

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

Answer 1

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.