Art & Finance Newsletter #19 - First of the Year
Hopefully everybody had a relaxing holiday season and are gearing up for a productive 2019!
I'm a bit short of time this week as I get various ducks in a row for this month. So the preamble will be short today.
That was it!
On to the art market...
New Tax Act Potential Tax Shield for Art
The Tax Cuts and Jobs Act signed by President Trump in December 2017 saw the elimination of 1031s, or “like-kind exchanges”, a tax vehicle that has been a powerful driver of the US art market in recent years.
Though created in the 1920s for farmers, 1031s—named for their tax law code—enabled investors to swap assets for another of like kind in order to defer paying capital gains tax (CGT) on profits made from selling high-value assets.
Despite the elimination of 1031s, Trump’s tax amendments have introduced a new swap known as Qualified Opportunity Zones (OZs), designed to spur investment in distressed communities throughout the country through tax benefits. The guidelines allow for the investment of profits from any sale of assets—including art—in OZs within 180 days with the potential of deferring, reducing and even finally eliminating CGT altogether.
There are currently 8,700 zones that qualify in the US and its territories such as Puerto Rico. If the taxpayer keeps their investment in the fund for ten years, however, no tax at all might be due. As for the Qualified Opportunity Funds (QOF), taxpayers could invest in existing ones or even create their own private investment vehicles, according to a brief issued by the US Trust. Though the administration of OZ investments can be complicated, there is already “very significant interest” in these tax vehicles from private clients and family offices.
The Art Newspaper - New Tax Act Potential Tax Shield for Art
Becoming a National Treasure Can Lower an Artwork’s Value
While Andy Warhol believed that “in the future, everyone will be famous for 15 minutes,” the artist retains his fame today almost 30 years after his death. Warhol is, in fact, so relevant to contemporary culture that despite being a thoroughly American artist, laws in other countries increasingly categorize works by the artist as cultural property subject to export restrictions and limitations on sale. Originally designed to protect antiquities and Old Masters, these rules and regulations are starting to ensnare art made in the 20th century.
Because they restrain trade, these laws lower the value of art that must remain in the local country, while providing no mechanism for the owner to be compensated for their loss. They also create incentives for owners to get their 20th-century art out of the country before it becomes subject to the rules. Italy and Germany provide good examples through which to understand the perverse impact of cultural property laws on the marketplace for 20th-century art.
Artsy - Becoming a National Treasure Can Lower an Artwork's Value
Opportunities For Those With Bold Tastes
“The hedge funder’s new Ferrari” is not Italian, fast or even a car, according to financier-turned-art dealer Asher Edelman. It’s a high-octane financial maneuver tied to the sale of artwork that’s part insurance policy, part betting slip.
Offering a guaranteed minimum price to those putting fine art on the block has become standard at top auction houses. Sellers like knowing that works won’t go unsold. In return, if the art sells for more than the guarantee, some of the profit above the prearranged bid goes to the guarantor.
To offload risk, auction houses are negotiating more “irrevocable bids”—also known as “third-party guarantees”—with investors who may see it as a display of financial prowess. With the art market peaking, opportunities abound but carry greater risk and should be approached with caution.
The biggest profit for a guarantor was last year’s auction of Leonardo da Vinci’s “Salvator Mundi” at Christie’s. Guaranteed to sell for more than $100 million, the painting was hammered at $450 million. Philip Hoffman, founder of the London-based Fine Art Group, estimated that the guarantor made as much as $150 million.
Bloomberg - Opportunities For Those With Bold Tastes
Get your delegate pass for China Now soon!
Please do not forget to secure a delegate pass to the China Now event - Mayfair, London 12 February - if you are planning to go.
We received more interest than originally anticipated (which is great), but we are short on space within the venue where the event will be held.
So do not delay on purchasing your delegate pass!
Speak soon,
Blake