If you collect rare and expensive art then chances are your collection is one of your most prized possessions. There are all kinds of art collectors, including those who collect for a hobby, those who use their collection as a business and others who collect art as an investment. Therefore, if you have an art collection then you have a lot of options as to what you do with it. However, using art as an investment can be a slippery slope. Collecting art as a hobby is, for the most part, very simple. Using an art collection strictly for business is fairly straightforward as well. Investing in art, on the other hand, can be very tricky.
Always Consider the Market
One of the first things to consider is the overall art market. While it might seem that artwork is bought and sold at a constant pace, the fact is according to some art market experts less than 1 percent of all paintings purchased end up being resold. So even though you can use art as an investment, be aware that the market is relatively small across the board. If you do have a piece that is likely to attract a nice payday then your best bet for selling it is to go through a fine art auction house. These auction houses will charge you a seller’s fee, but they are also more likely to attract wealthy buyers than the do-it-yourself online auctions.
Art Is a Long-Term Investment
Another important thing to keep in mind is that in almost all cases, art is an investment that takes time. Rarely can you purchase a piece of artwork and quickly turn around and sell it for a big increase. That means if you’re considering investing in art be prepared to hold onto it for a while before it makes any real gains. The market also tends to fluctuate a lot as the economy moves up and down. When things are good artwork and other collectibles are more likely to fetch higher dollar returns. On the flip side, when times are tough the value of these types of assets tends to decline.
The Tax Side of the Equation
Of course, as with any investment, you will also need to consider the tax implications of investing in art. The tax implications between someone who invests in art and someone who collects art can be substantial. The main difference between the two is that an investor purchases art with the purpose of profiting on it in the future. In any case, both collectors and investors must pay capital gains tax on any profit they make from their collection. If you’ve owned the art for more than a year it will be taxed at a rate of 28 percent. If you sell it within less than a year of first owning it then the profit is subject to the same rate as your other income.
Deductions and Losses for Investors
One more note: investors do have an advantage over collectors when it comes to deductions as they can deduct more of their related expenses than a hobbyist. Also, if your art investment losses exceed your gains then you can use those losses to offset other capital gains from your other investments.