Since its launch in 2002, Art Basel in Miami Beach has become what many consider the most prestigious and influential art fair in the Americas. The 2014 fair saw more than 70,000 international visitors descend on Miami for the four-day event, and the 2015 edition promises to surpass that figure, with 267 galleries from 31 countries exhibiting an estimated $3 billion worth of contemporary art from December 3 to 6. Investors and collectors from many Latin American countries, as well as from many other parts of the globe, come to the fair annually and many buy substantial artworks. Many such Latin Americans and other collectors who own real property in the U.S. (typically Miami) often also want to keep their art in the U.S. These collectors need to be aware of and properly navigate a host of special tax issues and rules, or risk facing a very significant and sometimes unexpected tax burden.

The Impact of Taxation on Non-U.S. Resident Collectors

Non-U.S. resident1 collectors should know, for example, that if they leave their art collections in their Miami condominium or at another U.S. location, without any further planning, the full market value of all such artwork (along with the condo, unless that has been planned for separately) is thereby exposed to U.S. estate tax at the time of the collector’s death (under current law, a federal estate tax rate of 40% would apply). It is relatively simple to plan around this potential tax liability with proper guidance from an international tax professional who is familiar with these issues. Similarly, a gift of art that is physically located in the U.S. at the time the gift is made by a nonresident can trigger U.S. federal gift tax at a 40 percent rate. This tax also is relatively simple to plan around with basic planning.

The Impact of Taxation on U.S. Citizen and U.S. Resident Collectors

The estates of U.S. citizens and U.S. resident collectors, on the other hand, will be taxable on the full value of their art regardless of where the art is located. Such U.S. clients must navigate a number of complex rules relating to charitable deductions and valuation, among other issues. Planning ahead is critical. Transfers to charity may result in valuable tax benefits in appropriate cases, and thus, viewed from a strictly economic, after-tax standpoint, most collectors would choose to transfer some portion of their collections to charitable beneficiaries. However, many collectors rightly value non-tax factors above strictly financial concerns. After all, most collectors are drawn to particular artworks first for love of the art itself, with financial factors being at most a secondary concern.

Many collectors will wish to transfer this carefully-created legacy to their family members, rather than to the public or a particular charity. In such cases it may also be possible to plan ahead in order to minimize the potential tax burden. For example, a collector may want to consider creating fractional ownership interests in works of art among the collector and selected family members and/or third parties which will entitle the owners of such works to valuation discounts. Such discounts could result in significant gift and estate tax savings for those involved. However, implementing such a strategy requires very careful and prudent consideration and application of various tax laws.

Because every collector is different, it is necessary to get to know the values and goals of the particular collector/client in order to properly advise each such individual. And given that art collections implicate so many special issues, for those clients with substantial art collections, it is often advisable at death to appoint a special art executor to handle the issues associated with the art.

Other Potential Tax Implications to Consider

Collectors also must face a variety of income tax issues. Nonresidents of the U.S. generally are not subject to tax on gains from sales of their artwork, even if the art is located in the U.S. at the time of sale, unless the selling nonresident is a dealer or otherwise engaged in the business of selling art within the United States. But U.S. resident taxpayers are taxable on their art sales. For purchased art, any gain generally is capital gain, but capital gain from art and other collectibles is subject to a higher 28 percent U.S. federal income tax rate (assuming the art is held for more than one year before sale) than other types of capital gains. In addition, the 3.8 percent net investment income tax may also apply, increasing the total combined U.S. federal income tax rate on gain from sales of art to 31.8%. Many investors in art and collectibles are not aware of this increased tax burden until they make their first sale.

Special rules also apply where art is received as a gift from the artist. In such cases, the art itself continues to be characterized as ordinary income property, so that a later sale by the donee is subject to higher ordinary income tax rates (under current law, a maximum of 39.6% at the federal level plus a potential 3.8% surtax, or a total of 43.4%). This result also can likely be avoided with simple planning.

Art collections are accompanied by a collection of unique tax and non-tax issues. Proper planning in this area requires knowledge of the many special tax-related rules that apply to art and other similar collectibles under U.S. law. It also necessitates a sensitivity to the emotional, non-financial, and non-tax issues specific to each collector client. Because Art Basel Miami has such significant international appeal, planning for the collectors coming to Basel to acquire new pieces also often requires knowledge of and experience with U.S. international tax rules in order to properly advise these international families.

1 For U.S. income tax purposes, this generally means someone who is neither a U.S. citizen nor a U.S. green carder who also does not spend 122 days or more in the U.S. on average each year.