Why the Rich Love Art: The Tax Shelter

Why the Rich Love Art: The Tax Shelter

Everyone loves art, and the rich are no exception to this rule. In fact, with the rise of affordable art shows, paintings and sculptures have become a popular way to decorate not only homes but also office spaces, especially in big cities. But why do the rich love buying art? The truth is that it’s actually one of the best tax shelters available to them—and I’m not just talking about buying original works from artists like Picasso, either.

Why the Rich Love Art: It's a Tax Shelter

The Basics of Buying Art

In general, you don’t need to pay any taxes when you buy or sell art; if it’s considered a work of art, it can be sold tax-free. The costs for buying and selling art usually only include delivery fees. You’ll also have to keep records of your artwork purchases for 3 to 7 years after purchase depending on how much they cost. If you have over $200,000 in one year in sales or purchases (or both), then you may have to report that information with your tax return. If you are an artist who sells his own works (and not those of someone else), then there are special rules that apply to you and what kind of income is taxable.

There are two types of art—functional and nonfunctional—that determine whether or not something qualifies as a work of art. Nonfunctional items like jewelry, furniture, and clothing aren’t considered works of art even if they contain elements such as color or design that could qualify them as such. Functional items include pottery, sculptures, paintings, photographs, glassware, rugs, textiles (such as quilts), and wall hangings. Even though you may have to pay taxes on some functional pieces of art when you sell them, they can still be tax-free when you buy them. So if you see an artist whose work you love but don’t have room for in your home or office building (or can’t afford to buy it right now), consider buying it anyway; it might be worth more later!

How to Determine Fair Market Value

If you’re an investor, you’ll likely have to know how to determine fair market value for a particular investment asset. Simply put, your tax basis is determined by fair market value. The higher your item’s fair market value, the greater your potential profit – and thus reduced taxes owed. As such, it can be well worth looking into how to estimate what your items are worth. Consider hiring an appraiser or checking out online resources like Auction Network Auctions , which specializes in art and collectibles of all kinds.

How to Choose the Right Pieces for Your Collection

Sure, you can just buy whatever looks pretty. But when it comes to investing in art as an investment strategy, there are certain factors that work in your favor—and others that might not. The auction house Sotheby’s noted four specific areas of importance to consider when choosing pieces for your collection. These include: artists who have brand appeal (those whose name alone makes their works more valuable), historic significance (works by acclaimed artists from past generations), current relevancy and popularity (contemporary pieces with big-name buyers), and provenance (work from well-known collections or museums).

How to Invest in Quality Pieces

There are a few ways to be sure that you’re investing in quality pieces. First, take into account where it will hang in your home. If it’s an investment you expect to last for years, then try to ensure that your collection matches both your aesthetic and space needs. The cost of art fluctuates depending on how desirable something is, so think about how long you plan on having it as well as its overall value. Try talking with an expert before making any big purchases to get their opinion on what might be worth buying now versus later—and always read up on experts’ opinions before spending money.

Where Do I Sell My Drawings?

Where you decide to sell your work is going to depend on how much you want to make and how much you want control over your sales. There are several ways to go about it, but remember that if selling is your business, selling in person will be very important for building relationships with collectors and getting word-of-mouth referrals. Direct sales are pretty low-tech these days; nothing like sitting behind a card table or manning a booth at an art fair. Regardless of how you decide to handle them, there are some things that should probably be kept in mind when deciding where and how you’re going to sell your artwork.

What If I’m an Artist?

That’s fine too. If you have material possessions to take care of, art is an excellent tax shelter. That’s because as long as your art is worth more than $5,000, you can donate it to charity and receive a tax deduction of up to 50% of its fair market value—or even higher in some cases (if your donations exceed 30% of your income). Just be sure you don’t pull out any pre-2000 artwork unless you are 100% sure it will hold its value or increase in value at least tenfold over that time period. A painting by Paul Gauguin went for $300 million dollars last year; if that happened three decades ago, then it would have been free money for rich people like him.

Final Thoughts on Investing in Drawings, Paintings and Other Fine Art

A common misconception is that to invest in art, you need to be rich. In reality, there are two main reasons most investors choose art as an investment—and both require very little money. The first reason is because it’s highly liquid. For those who don’t want to lock their money away for 20 years, that’s important news. A $5,000 investment can be sold off in three months or less and returned back into your portfolio (after fees) with relative ease. That puts art up there with other liquid assets like bonds and stocks when it comes to taking advantage of changes in market conditions or hedging against risks. The second reason is because fine art offers tax benefits. If you buy artwork from a living artist, you can write off 50% of your purchase price as a capital expense on Schedule A. That means if you spend $10,000 on new paintings by Andy Warhol, half of that cost ($5,000) will go directly toward reducing your taxable income. And if he dies? You get to deduct 100% of his death-related costs from your taxes! So what does all that mean? Buying artwork isn’t just about being an artsy person with disposable income; it’s also about being smart with your investments.

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