Becoming an art collector-investor sounds like a win-win strategy: It’s the chance to grace your walls with stellar pieces as you wait to see their value grow over the years.
But is there really money to be made in becoming an art collector? Or is it just a vanity hobby for those with money to spare and bare walls to fill?
If you’re not worried about liquidity and are willing to take a risk, investing in art might be a fun, potentially lucrative pursuit, as long as you keep a few things top-of-mind:
- As with any other investment, there’s no guarantee of seeing a positive return on your art.
- Dabble in this investing strategy only after you’ve got a fully-funded, liquid emergency savings account, no high-interest debt and are maxing out your retirement savings accounts.
- Stick with traditional investment vehicles, like 401(k)s and IRAs for retirement savings and 529s and other education plans for the kids’ college.
Finding the Right Art to Buy
If you’re new to the art investing scene, finding affordable works by the masters is unlikely. (The most recent Vincent Van Gogh piece sold at auction in 2017 went for $81.3 million.) Instead, explore living artists who are not under an exclusive gallery contract, says Baron Christopher Hanson, lead consultant and owner of RedBaronUSA.
Hanson advises researching artwork selling on the secondary market (a.k.a. private liquidation) and looking for “attic sale” or estate auction collections where you’ll find more volume.
Where does personal preference come in? There’s debate among experts over whether or not to buy art based on what you like vs. what is likely to appreciate in value.
Some experts argue that you may as well enjoy looking at your purchases because there’s no guarantee of a profitable sale later down the road. Others, like Hanson, warn against letting emotion (and aesthetics) cloud your financial decisions. “Some beginning investors mix the desire to make money by adorning their home with artwork as visual furnishings first, hoping to make money if they ever decide to sell,” he says. “You can do this if you want, yet it’s not 100% prudent.”
You’ll need to do a lot of research and networking in the art world to invest in art from a purely financial perspective. For a specific artist, track recent auction sales to get an indication of value. Galleries also serve as a good source for background information on a living artist with their pieces on display. Consider consulting an art professional who has access to an industry price database, particularly for work from deceased artists.
It’s also smart to get an appraisal on your artwork for both insurance and tax purposes. The Appraisers Association of America can help you identify a certified appraiser with specific expertise in the style of your collection. Just remember that an appraisal performed for insurance purposes is typically higher than a piece’s auction value because the insurance company accounts for other expenses involved in replacing it.
Every piece of art you buy as an investment comes with a high level of risk. It may be years (even decades) before an artist’s work becomes highly sought and you can sell for a profit. As your collection grows, keep tabs on the value your collection based on global auctions that track prices on similar artwork.
Keep in mind that the art market can be erratic: A once burgeoning artist could suddenly fade, leaving you with a piece valued at less than you paid. Plus, converting your work of art to cash is more involved that selling a traditional investment like a stock or mutual fund.
Other factors influence the value of art, particularly that of living artists. You may see an increase in value as an artist becomes more prolific, especially if he or she exhibits in a major gallery or museum. Scarcity also affects value: “The moment any burgeoning artist passes away, the value of their artwork may increase dramatically, simply because the body of their work is now finite,” Hanson says.
Art and Taxes
Taxes aren’t an issue on your art collection until you sell or donate a piece. At that point, any profit you make is treated as a capital gain. While most long-term gains are taxed at your normal income tax bracket, the IRS taxes net capital gains on collectibles (including art) at 28%.
If you decide to donate a piece of art to a non-profit organization, you can claim a tax deduction (but only if you itemize on your tax return rather than taking the standard deduction). You’ll need a professional appraisal to determine the fair market value. And to claim the full market value on your taxes, the art has to contribute to the nonprofit’s mission — think donation to a museum or university collection.
There’s one more hurdle to face and that comes with donating any artwork valued over $50,000: You must submit a claim to the IRS Art Appraisal Services, which could then be reviewed by an art advisory panel to confirm the value.
Is It Really Worth It?
The bottom line is that no matter how much money you have, there’s never a guarantee that any art will appreciate over time. And you certainly shouldn’t invest in artwork in the hopes of funding your child’s college tuition or your retirement.
But if you’re financially stable and your financial planning is in order everywhere else, starting an art collection can be a fulfilling process with the potential to grow in value.
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