Talk about a successful investment: Lise Wilks’ parents spent $19,000 on a Jean-Michel Basquiat painting thirty years ago. The painting, sold at auction at Sotheby’s in New York, was valued at $110.5 million. That’s the good news. The bad news, according to Bloomberg’s article, “Trust Planning Key To Recent $85 Million Basquiat Legacy,” is the capital gain of about $85 million, means that Lise may have a tax bill of about $37 million.
There’s a maximum 28% federal capital gains rate for collectibles, plus a 3.8% levy on investment income for top earners. In addition, New York City residents have another 12% tax. The precise tax bill or cost basis can’t be determined, without knowing whether the Basquiat was a gift or was passed to her through the parents’ estate. You can determine the cost basis by using the value of the work on the date of a parent’s death, assuming it was included in that parent’s taxable estate. Wilks’ parents both died in 2009.
The auction record for Basquiat at the time was $13.5 million. Sotheby’s achieved the $110.5 million Basquiat record, but that included the commission of $12.5 million on top of the $98 million auction price. If you take the Basquiat’s $13.5 million value as an assumed cost basis, her gain would be roughly $85 million. Thus, Wilks’ estimated federal tax is $27 million, plus the 12% New York City and state tax of $10 million.
Some strategies that a person like Wilks might use to offset the gain could include the following:
- Deferring capital gains taxes. Art investors can defer capital gains tax by using a Section 1031 exchange and using the net gains to purchase more art. Collectors can take advantage of this deferral. If you do this, however, be prepared to document your status as an investor.
- Capital gains can be offset by donations of cash or art during the year of the sale, or can be carried forward from prior years. Therefore, if a collector donates art to a museum, he or she would receive a deduction of the appraised value.
- You can donate to public charities gifts of cash and other non-appreciated property to offset up to 50% of your income. There is a limit of 30% for certain private foundations and this deduction is phased out based on the donor’s income.
Estate planning attorneys generally see families at this level of wealth increasing their philanthropic efforts, when successfully selling an asset at such a rarified price. Some may be waiting to see if an overhaul of the tax code does occur, but if the art market shifts, prices could take a tumble.
Reference: Bloomberg (June 12, 2017) “Trust Planning Key To Recent $85 Million Basquiat Legacy”