Photo by Derick McKinney on Unsplash Photograph past Derick McKinney on Unsplash

Art lawyer and taxation specialist Melissa Passman weighs in on the best practices for donating your art.

Altruistic your fine art to a museum or other establishment entitles yous to sure taxation benefits, but figuring out where, when, and how to offset the procedure can be daunting. So we've enlisted fine art lawyer and tax specialist Melissa Passman to share her seasoned expertise with Artwork Annal's collector customs.

Melissa is General Counsel for Alpine Global Management. She has a JD from UCLA and a LLM in Tax Law from NYU (where she also earned a BA in Art History). Prior to her legal studies, she worked for Gagosian Gallery in New York. At present she works with high-net-worth collectors and family offices, as well every bit up-and-coming artists and young nonprofits. Melissa also currently serves on the lath of JOAN, an exhibition platform in LA supporting emerging and underrepresented artists. She recently helped two organizations — Artists4Democracy, an creative person-led initiative to encourage art students to participate in republic,  and Cassandra Press, a radical Blackness Feminist publishing platform — acheive nonprofit status.

Here's Melissa's advice for collectors hoping to donate their art for either income tax deductions or manor tax exemptions (or both!).

Disclaimer: The following communication is informational in nature and is not a substitute for legal inquiry or a consultation on specific matters pertaining to y'all or your clients. Charitable fine art donations and estate planning are highly nuanced fields. Always consult professional counsel before structuring gifts to clemency.

Photo by Igor Miske on Unsplash Photo by Igor Miske on Unsplash

The time to beginning thinking nearly altruistic your art is NOW

The best time to beginning thinking virtually and analogous your charitable art donation is as soon in the fiscal year equally possible. "Don't wait to begin the process," says Melissa. "Due to time limits imposed by the IRS, the stop of the yr can get very busy for appraisers and all of the diverse parties involved in the donation process." Museums and nonprofits often take multiple levels of approvals — from committees, boards, trustees, et. al. — that donations demand in guild to be accepted. And that can have (a lot of) fourth dimension. To ensure that you lot're going to hit the deadline, information technology's all-time to offset early rather than rushing at twelvemonth's end.

Become confirmation from the donee that they actually want your art collection

Don't presume anything! "Anybody thinks they have a wonderful collection, just that doesn't necessarily mean that a museum will want it," says Melissa. "So it's critical to consult with your establishment of choice prior to naming it in your will or estate program." Establish a point of contact at the museum or establishment where y'all want to donate and make sure your collection is aligned with their mission and values.

The IRS likewise has stipulations that preclude the receiving institution from reselling the artwork within three years, unless it goes to another nonprofit organization. And so, if the organization that yous donate to, turns around and sells the work at sale to a private individual in two years, your income tax deduction may exist seriously reduced or totally revoked. Consequently, it's wise to stipulate in the donation agreement that the receiving institution agrees not to sell the piece of work for at least three years, specially for gifts in excess of $v,000.

Get an official "qualified" appraisal

You lot volition need an official appraisement to determine the fair market value of your drove for all gifts in excess of $5,000. Observe a qualified appraiser who is a certified member of one of the following groups: Appraisers Association of America (AAA), American Social club of Appraisers (ASA), The International Gild of Appraisers. Appraisers ordinarily accuse an hourly charge per unit, so the cost for their services will depend on how many artworks you are having appraised at 1 time.

If your artwork appraisal (and claimed deduction) reaches $20,000, then you must attach the actual appraisal written report to your grade reporting the deduction to the IRS. The IRS has an art informational console that will sometimes be brought in to substantiate whether an appraised value is really correct or not. Sometimes appraisals for estates might seem unduly low, while appraisals for income revenue enhancement deductions may appear higher than market value, leading to an audit by said IRS panel.

This is why a qualified appraiser is so important. Appraisers that have been qualified by professional appraisal organizations are bound past strict upstanding standards and provide an objective 3rd-party valuation that can protect you from an overzealous IRS inspect.

Important to note: the IRS requires that qualified appraisals be dated no earlier than 60 days earlier the date of the contribution and no afterwards than the due date of the tax return reporting the contribution. This is why the end of the year is the worst time to start shopping for appraisers.

Some institutions are more favorable than others

Definitely consider the identity of the organization that you want to donate to, every bit non all charities are created equal (specially in the optics of the IRS). In terms of "related use requirements," it'southward important to plant that the donee will be able to "utilise" the gift as intended. For example, donating art to a hospital might non consequence in the full deduction, because a hospital may not "use the art" in a manner accounted appropriate by the IRS. Therefore, it's always recommended to consult a professional person attorney before promising any charitable gifts of fine art.

When information technology comes to 501(c)(3) organizations, there are three primary categories, each with their ain advantages:

  • Public charities: To qualify equally a public charity, an organization must receive one-3rd of their operating income from public donations, showing that they have a wide base of support for their programs and initiatives. Public donations tin come up from individuals, businesses or other grant-making organizations.
    Donations to public charities by collectors can exist tax-deductible to the individual donor upward to 60% of the donor'due south income for greenbacks donations and 30% of income for the fair market value of uppercase assets, while corporate limits are by and large 10%. These organizations are also required to have a board composed primarily of independent individuals. (source)

Examples: Museum of Modern Art, New York, NY; Walker Art Heart, Minneapolis, MN; Perez Fine art Museum Miami, FL

  • Individual operating foundations :This is a form of hybrid-institution, in that its donation deductibility resembles a public charity, while its governance structure is more like to that of a individual, non-operating foundation. These foundations manage active programs and most of their earnings go back into their operations and programming.

Examples: Glenstone Foundation, Potomac, MD; FLAG Art Foundation, New York, NY; Art + Exercise, Los Angeles, CA

  • Private foundations / not-operating foundations:Single-family unit foundations are examples of private foundations, which are too referred to as "not-operating foundations" and therefore typically do not have active programming. Donations to individual foundations of artwork by a collector can exist revenue enhancement-deductible to the individual donor up to 20% of the donor's income based on the fair market value of the artwork.
    While these types of foundations take stricter rules on governance than public charities, they offer more command and so may be favored by some estates. However, because the IRS doesn't desire wealthy families to simply open a private non-operating foundation in order to hoard intergenerational wealth, these types of foundations are expected to comply with an annual 5% distribution rule. This dominion stipulates that v% of the total value of the endowment'due south assets must be distributed past the organization as charitable donations, annually.

Examples: Keith Haring Foundation, Andy Warhol Foundation for the Visual Arts, Pollock-Krasner Foundation

Donating art at home vs. abroad

If you donate to a non-U.s.a. institution, y'all can even so merits an manor revenue enhancement charitable deduction. To claim an income tax deduction, nonetheless, the institution must be based in the US. Many international museums have fix "Friends of…." charities (i.e. American Friends of the Heart Pompidou), in order to circumvent this dominion. By creating a U.S.-based foundation that tin can take donations, American donors tin merits (and receive) an income revenue enhancement deduction even when the parent organization is located overseas.

Consider state-by-state sales tax laws

Sure states take very favorable laws when it comes to sales tax on artwork. In other states, not and so much. If you're not compliant with state sales tax laws on your art purchases, you lot could cease up owing a lot more than than anticipated, and then staying up-to-date is recommended.

Due to the proliferation of due east-commerce and direct-to-consumer online businesses, for example, the rules are changing and sellers may be required to collect sales taxation on out-of-state sales. A 2018 Supreme Court Ruling, known collegiately equally the Wayfair ruling, determined that "states can mandate that businesses without a physical presence in a state with more than 200 transactions or $100,000 in-state sales collect and remit sales taxes on transactions in the country."(source) Each land determines its own rules.

Five states currently have no sales or use tax: Alaska, Delaware, Montana, New Hampshire, and Oregon. Delaware has a "freeport," simply aircraft art there to avoid sales taxation is dicey. Art that is sitting in storage is non existence "used" properly or in that location may be a question about intent, and thus could be the subject of a use tax equivalent to the property's sales revenue enhancement.

California has a "90-day" rule which stipulates: if an artwork spends xc-days out-of-state every bit a loan to an institution or is otherwise displayed (and is "being used" properly), and so the owner pays no California sales tax. Sales tax in California is notoriously loftier (10.25% in Santa Monica) so collectors in CA accept been looking to Oregon where they can, theoretically, loan an artwork to a museum group prove before shipping it dorsum to their residence, sales tax-costless, later the 90-day threshold.

New York has perhaps the nearly complicated regulations when it comes to sales revenue enhancement and art; not surprising, since New York City is arguably the center of the art world. Collectors who own a residence in New York are subject to sales and apply tax on fine art bought from New York galleries and sale houses, fifty-fifty if they spend the bulk of their time elsewhere (unless their New York residence is beingness rented out).

In New York, fine art shippers are not considered "common carriers" and therefore galleries and auction houses must coordinate all shipping quotes for the buyer. Gagosian Gallery was in hot water a few years ago for this very reason, ultimately agreeing to pay $4.5 million in back taxes. (source)

New York is also cracking downwards on resale certificates, in which a buyer may merits to exist a dealer and claim a sales taxation exemption, only to hang the work in their apartment for their own enjoyment. In Nov 2020, Sotheby's was fined for not collecting sales tax on $27 million of art sales to a heir-apparent who had knowingly misrepresented himself as a dealer. (source)

Ultimately, the sale firm was on the claw for the back taxes. In response, nevertheless, art galleries and auction houses are now including an indemnity clause in their sales agreements, which stipulate that the buyer is responsible for remitting sales tax (and the seller is indemnified from taxation liability).

The question here boils down to intent: if you lot're non an actual dealer and therefore not truly intending to resell the artwork, then you lot're non eligible for the deduction. Simple as that.

Beware the seeming quid-pro-quo

"The IRS doesn't like quid pro quos," says Melissa, "so if a donation appears to be more 'pay to play' than a true act of charity, they could revoke your tax deduction." Collectors ownership sought-afterward artists from baddest galleries are sometimes asked to donate fine art as a condition of sale:  i.e. "If you want this painting by artist X, then yous also have to buy this painting past artist Y and donate information technology to a museum." The IRS is apparently wise to this sales strategy, and then caveat emptor.

Limit restrictions on your donation

In terms of estates, Melissa explains that if a donation has "too many strings attached," the IRS will not consider it a true donation and the possessor will lose their exemption. "The question is, did yous sufficiently give upward control?" she says.

If the agreement contains a clause, for example, stating that "X and Y condition must be met, or else the museum is required to render the work," that could be interpreted past the IRS as also many restrictions. In other words, "how remote is the possibility that the work will revert back to the donor?" explains Melissa. She too emphasizes that, equally long as the work stays with the museum, information technology'southward okay to add a few conditions, such as exhibition clauses.

Withal, many institutions have their own regulations, such equally the MoMA in New York. "All gifts have to exist unconditional," according to MoMA Managing director Glenn D. Lowry, before they volition be considered for acceptance. Equally noted by The Planned Giving Design Heart on their website, "This is standard practice for many museums." (source)

Use it or lose it

The estate revenue enhancement exemption ceiling is not fixed and is subject to change. The electric current individual exemption limit is $11.7 million (for 2021), simply based on the 2017 federal taxation legislation, that ceiling volition lower to around $5 million (adapted for inflation) in 2025. This means that 2021 is still a time when people can yet use the college exemption ceiling, ensuring that their heirs go a maximum credit, and they should. Because, equally Melissa emphasizes, "the estate exemption really is a 'use it or lose it' situation."

An art collection direction database, such as Artwork Archive, will streamline your donation process, so yous'll take all your documents and information compiled when it comes fourth dimension to file.