Forbes Best-In-State Wealth Advisor, Cary Stamp, CFP®, combines his passion for fine art with decades of financial knowledge to share key issues involved in donating fine art to charities. There are some details that make all the difference.
One of my passions is the art world and understanding art. And I like to couple that with my knowledge of finance and figure out how I can use one passion to feed off and to help the other.
I want to explain today why donating art can be a very valuable strategy, both for building a legacy in public museums, as well as making a charitable contribution that you get to write off on your income tax returns.
So, art and charitable deductions. Visual arts, sculpture, anything of that type is considered a capital asset, which means that you have to hold it in your possession for at least one year before you’re able to give it away and take a tax deduction or take a tax write-off on it. A lot of people will want to go to a gallery that has a hot artist and say, Hey, I’ll buy one painting for myself and donate one painting to a museum, if you sell me the two paintings. Well, keep in mind, if you want the tax deduction for that transaction, you’ve got to hold it for a year.
You’re going to need to get a qualified appraiser, somebody that knows what they’re doing in the art world. And that’s somebody that can truly establish what the value of the piece is that you’re donating. I’ll give you an example. Several of our clients have pieces of art that have been in the family for many, many years. Maybe it’s a Calder, maybe it’s a Warhol, maybe it’s a Rauschenberg, some famous artists that they paid very little money for that’s now worth hundreds of thousands, if not millions of dollars. The family might have a fairly substantial estate. Well, one thing that they may want to consider doing is making a contribution before the first generation or before Mom and Dad passes away. You get a double benefit from that. You get a tax deduction and you get to reduce the size of the family’s estate so that when mom and dad do pass away, that contribution has already been made, it’s outside of their estate and we don’t have to pay tax on it.
There are a few things to keep in mind. You have to consider that you can only offset 30% of your AGI, which stands for your Adjusted Gross Income, with your contributions. So if you make $300,000 a year, 30% of $300,000 a year is $90,000. So if you give away a piece of art that’s worth $150,000, you can only deduct $90,000 against your income taxes and you always have to itemized deductions to be able to take this one.
Lastly, the charity type and who you’re giving it to truly matters. It has to be a charity that’s going to use the art as integral to its mission, which means that you can’t just give the art to any charity that you want to. There’s a distinction between what’s called a public institution, which is a typical museum that’s open to the public, that they can come in and view the art and the art is absolutely necessary for what they’re doing for their charity. But let’s say it’s a children’s hospital. The art’s not necessarily necessary for their mission. And in that case, your deduction is substantially limited because it doesn’t fall within the scope of what that charity does primarily.
In fact, if you do make contributions like that and you give away to a charity where it’s not incidental to their mission, you’re still going to get a tax deduction, but it’s going to be limited to the basis of what you paid for that art, not the fair market value. So if you want to give art away, you’re generally smart to give it to an organization or an institution that’s going to be able to use it in their collection.
But don’t assume that they’re going to take it. Even if it’s in your will, that doesn’t mean that the Art Institute or the museum has to accept the pieces that you’re wanting to leave them. Always check with them in advance and check with your tax and financial advisor about how you set up this transaction, so we take full advantage and full benefit of everything that you’re entitled to.
I’m Cary Stamp with Cary Stamp and Company and this has been a Principled Wealth Moment.