Art as an Investment and Tax Changes
Art is a part of the top ten categories of “Luxury Investment Index”, according to the 2018 Wealth Report. Art has been treated as an alternative asset for many years as “the world’s wealthy are flocking to auction houses, dealers and art fairs in ever greater numbers,” as The Financial Times reports.
While about half of the world’s 200 top art collectors are based in the United States, Trump administration has removed art as an asset that benefits from a 1031 exchange. This used to allow capital gains tax to be deferred when selling property, as long as the proceed is used to buy more property. Now that art has been removed, sellers need to pay the 28 percent tax. While some think that this reform will affect collectors’ willingness to sell, others with expertise in the art market predict that this will only affect the few ultra-wealthy collectors. Diana Wierbicki, a global head of art law at the firm Withers Bergman LLP in New York, thinks that the older generation sellers might want to pass the artworks onto family members rather than facing the capital gains bill. Ms. Wierbicki also says this higher expense of getting out of the market might prevent younger investors from getting into the market. The art auction market will still remain active as Christie’s will offer 85 works of exceptional American art in November. There are also guarantees from third parties that “gets rid of the risk of work not selling, and that’s priceless,” as Christine Bourron, founder and chief executive of Pi-ex, says. The competition between auction houses pushes up valuations and creates “growth”. “There’s huge volatality in the market,” said Ms. Bourron. “The fhird-party buyers are taking the full risk of that volatility.”
Auction is an interesting area for studies. While the form of auction that we learn in class is based on fixed personal valuation and prices, when it comes to investments and competition, the value becomes influenced by others’ valuation and the resell price. While some collectors might buy art pieces just for their desire to collect art, most will buy the art to resell it. Because of this, buyers’ willingness to pay more will depend on how much risk they have to take to resell the art piece at a certain price. As Ms. Bourron mentions, this market carries huge volatility, and the value of the art piece is determined by competition between auction houses and the trend of art at the time. The role of third-party buyers is also interesting as they remove some risks of the sellers. With the new capital gains tax, buyers need to make sure that the value of the art piece will rise by at least 28% by the time they resell it, as they will lose that much if not. As less sellers will want to sell due to the tax, the scarcity of art pieces can also raise the market value of the art pieces in market as the number of buys will remain but less sellers will ant to sell.
Here, we learn that auction in real life is more complicated than the system learned in class. While all the auction systems learned in class are assumed that people’s valuation of the auction item is fixed and private, art pieces being auctioned off as investments can influence the buyers’ valuation of the art piece as the auction goes on, as the valuation is not based on the buyers’ own desire to buy the item but is based on many different factors such as competition, future growth of the value, third party guarantees, and more that influence their value as an investment.
Sources:
https://www.nytimes.com/2018/09/14/arts/design/art-1031-exchanges-guarantees.html?rref=collection%2Ftimestopic%2FAuctions&action=click&contentCollection=timestopics®ion=stream&module=stream_unit&version=latest&contentPlacement=1&pgtype=collection
https://www.nytimes.com/2017/11/15/arts/design/leonardo-da-vinci-salvator-mundi-christies-auction.html