I know you’ve figured this out already – collecting art is fun and relatively easy assuming you have a passion for what you are collecting, have the wall space to hang the art, and the means to buy it. But when it comes time to planning for the disposition of that work of art, the only easy thing is recognizing how hard it is to transfer that asset to future generations. That’s why so many art collectors default to the “I’ll give it to my kids” plan of action. Which is essentially a choice to make no choice (unless you are absolutely, positively certain that your family wants to keep your art for the long haul, and not just long enough to make sure you won’t prevent them from monetizing it!). Assuming you would like to give your art away during your lifetime to someone or some organization that would appreciate it, and assuming your relatives are not those people, donating the art to a charitable organization may make sense to you. Plus, you might think, “all the better, because I’ll get a nice big charitable deduction as well”. Well, yes and no!!
Donating art and collectibles during your lifetime is a wonderful thing, but in addition to all the federal income tax rules that comes with donating assets, it also comes with some important IRS rules that must be adhered to if you want to maximize your deduction for donating art. One of the most important rules is the “Related Use” rule. No, it doesn’t have to do with your lineage or your Uncle Harry. It does have to do with donating tangible personal property to a charitable organization, and how that property is used by the recipient charity.
If the use of the art is deemed “related” to the mission or purpose of the charitable organization, then the donor could be entitled to a federal income tax deduction on the asset’s fair market value, subject to a cap of 30% of adjusted gross income (AGI). This assumes the collector has followed other rules including owing the asset for more than one year and giving the asset to a public charity. What happens if the art is not going to a related use? If the use is unrelated, then the federal income tax deduction will be limited to the cost basis of the art (though up to 50% of the donor’s AGI).
The federal income tax treatment of donating art depends to a large degree on how long you’ve owned the art, the type of charitable organization to whom you want to donate, and how the organization intends to use the art. It’s complicated, but important to good planning, and an excellent reason why your CPA is important to the future life of your art collection!!
What does that mean in reality? A good example of related use is giving your art to a museum which could then use the art as part of its permanent collection and in adherence to its mission (assuming the museum accepts your gift of art). Giving your art to the local animal shelter, which wants to sell your art immediately to generate some cash to add to its endowment fund is an example of unrelated use. That doesn’t mean you shouldn’t give the art to your local animal shelter, it just means that you may be looking at a much lower potential deduction arising from that donation. Which may, or may not, be a deal breaker for you. It all depends on your motivation behind donating the art and your relationship with the charitable recipient – and that, you could say, is all relative.