A provision in the tax code which has been used by art investors to avoid federal taxes may be eliminated by the Obama administration, leading to a surge in anxiety among those who treat art as an investment commodity. The provision, § 1031 of the Internal Revenue Code, allows those who invest in art to delay any taxes owed on a sale by immediately reinvesting the gain in a similar, or “like kind,” asset. As long as the investor continues to exchange the art for more art, and the transfer qualifies, no capital gains tax (as high as 28% for sales of art or other collectibles) may ever be owed, even after the investor dies. There is no limit to the number of exchanges an investor can use to delay taxes. The IRS does scrutinize these transactions; the buyer must prove that the purchase was made as an investment for profit rather than personal enjoyment. The growth of the art market may rely on treating art as another asset class, but whether this particular asset class deserves favorable tax treatment is part of the debate.
The proposed revision of the law for the 2016 fiscal year would eliminate this tax break for sales of art, a change which could potentially bring in $19.5 billion in tax dollars that would otherwise have been avoided. However, some supporters of the provision say the savings promotes growth and creates jobs. The direct link between tax breaks for very wealthy art buyers and job growth seems tenuous.
More via the New York Times.