Art & Finance Newsletter #23 - New Tax Zones & Foundation Issues
Hello from Los Angeles! I've just arrived after several days in Bermuda meeting with a private bank, several fiduciaries and the Bermuda Development Agency. Some fun things in the works on the island!
A heads up to those of you in Hong Kong: Masterpiece London Art Fair will be holding it's first edition of the fair in Asia this upcoming October in Hong Kong.
On to the art market...
OZs: New Tax Benefit for Art Collectors
Opportunity Zones (“OZs”) are economically-distressed communities where new investments that meet certain criteria are now eligible for preferential tax treatment. As of December 2018, nearly 9,000 communities across the country have been certified as OZs. They exist in every state, every major city, and include numerous suburban and rural locations.
Some OZs are also located near established communities and transportation hubs. In New York City, for example, 306 census tracks (the unit of designation in the OZ process) have been classified as OZs: Manhattan has 36, most in the northern half of the island; Brooklyn has 125, including parts of Williamsburg, Bushwick, and the entire Brooklyn Navy Yard; the Bronx has 75; Queens 62; with Staten Island bringing up the rear with 8. Approximately 1.2 million people live in these designated areas.
The cornerstone of the OZ program is a new type of investment vehicle called an Opportunity Zone fund (“OZ fund”). Taxpayers who sell appreciated assets like stocks, real estate, or fine art can receive three special tax benefits if they roll their gains into an OZ fund within 180 days. First, they can defer federal taxes on these gains until December 31, 2026, or until they sell their Opportunity Fund investment, whichever is earlier. This enables investors to put more capital to work for a longer period. Second, if they hold the fund for at least 5 years prior to December 31, 2026, they can reduce their deferred gain subject to federal taxation by 10 percent, which will lower the ultimate tax they paid on that gain. If they hold the investment for 2 more years, the tax liability is reduced an additional 5 percent, for a total reduction of 15 percent. Third, they can eliminate federal taxes due on OZ fund profits if they hold the investment for at least 10 years.
Unfortunate Guarantor Debacle
It was supposed to be a blockbuster auction lot. But when a guarantor defaulted on the deal, the 2016 sale of Gerhard Richter‘s Jet Fighter painting—estimated to fetch as much as $35 million—crashed instead.
Now Phillips is trying once again to sell Jet Fighter (1963) in its London evening sale on March 7. But this time around, it’s priced at the much lower estimate of £10 million to £15 million ($13 million to $19 million).
The auction house is hoping to recoup at least some of the $24 million it paid to the consignor, the late billionaire philanthropist and Microsoft co-founder Paul Allen, during the botched 2016 sale.
The following year, the auction house sued the third-party guarantor, described as a wealthy Chinese businessman named Zhang Chang, for payment. Typically, a third-party guarantor assumes all or part of a sale’s risk in exchange for a share of the upside if the work outperforms expectations at the sale. But if the bidding doesn’t exceed the minimum guaranteed price, the guarantor agrees to buy the work.
Artnet - Unfortunate Guarantor Debacle
Funding Dispute, Foundation & Gallery
The Jerwood Foundation says it will apply more “stringent conditions” in allocating its charitable funds after a breakdown in relations with the Jerwood Gallery in Hastings. The UK-based philanthropic organisation has sponsored the gallery on England’s south coast since it opened in 2012, but has announced plans to terminate the funding agreement by the end of this year.
The decision means that the gallery will be forced to give up the Jerwood Collection of almost 300 works of Modern and contemporary British art assembled by Alan Grieve, the chairman of the Jerwood Foundation, including pieces by Barbara Hepworth and Stanley Spencer.
The works will be removed from the gallery “in a reasonable manner” before the end of November, Grieve says. In the event that the Jerwood Foundation were to undertake a similar partnership with a different gallery in future, it would follow the standard sponsorship practice recommended by Arts Council England, he adds. (The foundation remains affiliated with Jerwood Arts, the contemporary art funding and commissioning organisation based at the Jerwood Space in London.)
The Art Newspaper - Funding Dispute, Foundation & Gallery
Documentation, Documentation, Documentation
Recently I've been encountering more and more collateralization situations in which the clients are unable (and unfortunately unwilling) to produce the necessary documentation of the art works they own. Not much can be done for clients in these cases unfortunately.
So if your clients are in the process of purchasing art or possibly structuring their collections it's a great time to get their ownership titles, provenance, etc. documents in order. Much easier to walk them through the process at that time.
Something to keep in mind!
Speak soon,
Blake