Collectors of fine art used to be able to "donate" paintings, sculptures, etc to museums and take advantage so-called "fractional gifting"- a method to avoid capital gains tax. From what I gather from this WSJ article (subscription possible required), owners of fine artworks could loan out the pieces to a museum for a partial year, take a deduction as part of the reduction in value of the art by the virtue of it being in the possession of the museum, and continue to do so over time until the value was exhausted.
Not so anymore. The article states that, in light of changes made in 2006 as part of a pension-reform law, the IRS now looks at the value of the painting at the time of the first gift.
The article illustrates the before and after effects as follows:
Here's how it worked: The donor would take a deduction based on the first contributed stake -- say, $4,000 for donating a third of a $12,000 painting. If the collector donated another one-third stake later, and the $12,000 painting had appreciated to $30,000, the next deduction would be $10,000. The donor could continue to take advantage of this until he gave away the entire interest in the artwork, and he could take as many years as he wished to do so.
.....
Today, it doesn't matter if that $12,000 canvas leaps in market value to $30,000; art contributors can't take ever-larger deductions if the donated artwork continues to rise in value. As far as the Internal Revenue Service is concerned, for deduction purposes, the value remains frozen at $12,000, the value at the time of the initial gift. Worse for donors, if the artwork happens to depreciate, later calculations are based on that lesser value.
Additionally, art givers now have only 10 years -- or until the donor dies, whichever comes first -- to hand the work over to a museum for good. Otherwise, the IRS recoups a portion of the deduction, plus interest and penalties.
The downside to all of this? Donations to museums are down and curators are complaining to their congressional representatives.
The article further delves into other methods of tax planning for artwork: charitable remainder trusts and donor-advised funds.
Myself? I'm keeping my "Dogs Playing Poker" print on my office wall.
