Art Collection Tax Strategy: Replace Like-Kind Exchange With OZ Program

Art Collection Law: Tax Strategy Solution for Like-Kind Elimination

Picture to accompany article about art collector tax lawFor decades, art collectors relied on “like-kind exchanges” to temper tax obligations. Unfortunately, lawmakers scrubbed them from the new tax code.  But all is not lost. Recently, Art News suggested substituting the new “Opportunity Zone” program as a tax strategy. We also think the idea is worth considering. Let’s take a look.

Art Collector Tax Law: How It Used To Work

In the past, many art investors used “1031s” — aka “like-kind exchanges” — to avoid capital gains tax. Instead of currency, collectors would swap paintings, sculptures, and assorted artifacts. If participants completed a given transaction within 180 days after the opportunity presented itself, they avoided capital gains obligations.

Given this tried-and-true tax strategy, many folks weren’t thrilled about the elimination of 1031s from the new tax code.

Art Collector Tax Law: “Opportunity Zones” Could Be A New Tax Strategy Option For Collectors

Like-kind exchanges are out, but a new option is on tap: the Opportunity Zone program.

Conceived as a win-win solution for both investors in want of a government-approved tax shelter and under-served communities in search of revitalization, the so-called “OZ” program allows investors to defer tax obligations by investing in developing neighborhoods.

In theory, art collectors that sold pieces in 2018 could invest the proceeds in an OZ-project or develop one. Taxpayers who hold the investments for five years will enjoy a 10 percent tax reduction. The percentage ticks to 15 percent for seven-year stalwarts; and if set up correctly, ten or more years may eradicate tax altogether.

Example of How An Art Collector Could Take Advantage of the Opportunity Zone Program

Art collectors could invest in established OZ-projects, of which thousands are already underway, or open new galleries in designated zones. Doing so would bring jobs and money-spending traffic to neighborhoods that need a boost. Simultaneously, investors enjoy tax breaks on the initial investment and subsequent profits produced by the venture.

Art Collector Tax Law: The Potential Downside of Opportunity Zones

Many people are skeptical of the OZ program, believing it’s gentrification on steroids. The argument is fair and must be addressed during project developmental stages. Pairing the right projects with the right communities is key to the program’s success.

Is The Opportunity Zone Tax Strategy Program Right For You? We’ll Let You Know.

If you’re an art — or any other — investor stung by the like-kind elimination, then give us a call. We’ve mapped out several options that could make up for any past 1031 positioning you can no longer leverage.

The Gordon Law Group is a full-service tax law firm. We help families, investors, businesses, and working individuals save money on their taxes. Get in touch today to chat about what we can do for you. We won’t waste your time, but we can probably save you a bundle.

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