Like Kind Exchanges

Aris, the Art title insurance brokerage recently sent out an alert and connected article on Like kind changes to defer gains on artworks.  The exchange, should it meets all of the IRS regulations allows the collector to sell an artwork and buy another and defer the taxable gains.  This is important to high end collectors where art has been appreciated and  tax rates can reach above 30%.

This information fall more into the accounting category rather than appraisal and valuation  but it is also good information to know about and be familiar with.

Aris reports

TRUST & ESTATES - Like-kind IRC 1031 exchanges allow art investors to defer tax gain recognition on the sale of artworks, which is especially attractive now because art prices continue to climb and taxes on art sales can have a combined federal rate up to 31.8 percent. To secure 1031 tax benefits, taxpayers must satisfy several strict requirements including proving that the replacement and relinquished property are like-kind and among other factors used in the same place, that is, inside or outside of the United States (see also ARIS news October 5, 2011).

[ARIS Commentary: Taxpayers, qualified intermediaries and financial or legal advisors involved in like-kind exchanges of fine art and important collectibles should be cognizant of the significant consequences and risks of unwinding 1031 exchanges. Because of the opaque and global nature of the art market, in which undisclosed principals with different nationalities transact multi-million dollar deals, exchanges can unwind due not only to investors lacking clear legal title but also to the replacement or relinquished property being "used" in different locations. Title insurance can help to establish that artworks are like-kind through title insurer-certification of location of subject property for purpose of "predominant use" inside or outside of the United States without impacting the transacting parties' desires to preserve their confidentiality.]

Source: Aris & article on Like Kind Exchanges