How to Donate Art and Save on Taxes

The art world is currently in the midst of fall auction season, which includes the recent Sotheby’s auction of the collection of its embattled former owner, A. Alfred Taubman, and many buyers are carefully selecting and making significant acquisitions for their collections. With the addition of new pieces to their trove, collectors also take this time to see which objects they can now do without. While selling art, either in a private sale or at auction, is one way to cull a collection, making a charitable donation of art can result in substantial savings on federal income tax. By way of example, let’s say a collector bought a painting for $5,000 a few years ago that now has a fair market value of $20,000. If the collector donates the painting to a qualified charity and meets specific requirements in making the donation, a taxpayer who is in the 35 percent tax bracket would save $7,000 in federal income taxes. Through a qualified donation, the collector would recoup his original $5,000 purchase price and make a $2,000 tax-free profit, all while having the chance to appreciate the work through its ownership. To realize the tax benefits of making a donation of art, the collector should be concerned with four issues: (1) whether the charitable organization to which the donation is made is public or private; (2) whether the property being donated is long-term capital gain or ordinary income property; (3) whether the donation is in compliance with the related-use rule; and (4) whether a qualified appraisal of the property is necessary, according to “Art Law: The Guide for Collectors, Investors, Dealers, and Artists,” by Judith Bressler and Ralph Lerner, (4th ed. 2013).

A collector looking to make a charitable donation first needs to determine whether the charity to which the donation will be made is a public charity or a private organization. If a donation is made to private organization, a deduction will only be allowed for the cost of the donation. If a donation is made to a qualified public charity, a deduction can be taken for the full market value of the donated property at the time of the donation. IRS Publication 526, titled “Charitable Contributions,” defines qualified organizations as “nonprofit groups that are religious, charitable, educational, scientific, or literary in purpose, or that work to prevent cruelty to children or animals.” A collector can verify whether the organization is qualified to accept charitable contributions by asking the organization directly or by checking the “Exempt Organizations Select Check” on the IRS website.