Art Is Seen as a Glittering Investment. Will New Taxes Take Off the Shine?
By Scott Reyburn
Sept. 14, 2018
With a new season of international art fairs, auctions and exhibitions about to begin, many are talking up art as the alternative asset of the moment.
“The world’s wealthy are flocking to auction houses, dealers and art fairs in ever greater numbers,” said a special report earlier this month in The Financial Times on how private banks are helping the world’s wealthiest individuals collect art and make the most of its investment potential.
The 2018 Wealth Report published in March by the realtors Knight Frank took a similarly positive view. Art was the top performer of the 10 categories in its “Luxury Investment Index.”
It remains to be seen if those perceptions will be maintained at next month’s “Frieze Week” in London and “FIAC Week” in Paris, and the forthcoming calendar of auctions in London, Paris, Hong Kong and New York.
About half of the world’s 200 top art collectors are based in the United States: Will the Trump administration’s recent tax overhaul, cutting rates for both corporations and wealthy individuals, make that powerful group even more willing to spend its millions on art?
“It’s not going to make a big difference,” said Diana Wierbicki, global head of art law at the firm Withers Bergman LLP in New York. From Ms Wierbicki’s perspective, a far more significant element in the Trump administration’s tax changes has been the removal of art as an asset that benefits from a 1031 exchange, a mechanism that formerly allowed capital gains tax to be deferred by rolling over the proceeds of a sale to buy more art. This tool was regularly used by some of America’s wealthiest investor collectors.
Ms. Wierbicki thinks the reform will affect some collectors’ willingness to sell. “It depends on the age of the collector,” said Ms. Wierbicki. “The older generation is going to be more thoughtful,” she added. Collectors whose artworks have soared in value may want to pass them onto family members, rather than face a capital gains bill of 28 percent, she said.
As for younger collectors, “this higher expense of getting out may make them think about investing in other markets,” said Ms. Wierbicki.
Others with expertise in the art market point out that the 1031 exchange was only used by relatively few ultra-wealthy collectors who were regular sellers as well as buyers.
“They’re a small subset,” said Todd Levin, an art adviser based in New York. “They’re not the whole art market, and we’re only talking about America. But the effect won’t be negligible.”
For outsiders, perceptions of the art market tend to be based on dazzling auction results, particularly at the bellwether sales in New York in May and November. Christie’s and Sotheby’s have both made preliminary announcements suggesting that wealthy collectors and their estates are still willing to sell prize assets.
In November, Christie’s will offer 85 works of exceptional American art from the estate of the travel entrepreneur Barney A. Ebsworth, who died in April. The works are valued at a total of $300 million, and the pick of the group is undoubtedly Edward Hopper’s haunting 1929 painting “Chop Suey,” showing two young women lunching in a Chinese restaurant, which Christie’s describes as “the most important work by the artist still in private hands.” It is estimated to sell for at least $70 million.
Christie’s will also be offering David Hockney’s 1972 masterwork “Portrait of an Artist (Pool with Two Figures)” — familiar from the movie “A Bigger Splash” — with an estimate of about $80 million, a new auction high for a work by a living artist.
Sotheby’s will include the 1913 painting “Pre-War Pageant” by the pioneering American modernist Marsden Hartley in its November Impressionist and Modern sale. The work is one of a group of admired abstract compositions Hartley made in Berlin from 1912 to 1915. Like the Hopper and the Hockney, this is estimated at a new price level for the artist at auction: $30 million.
Arrangements will only be clarified on the night, but it is highly likely that guarantees, provided by undisclosed third parties, will make these new highs foregone conclusions.
“Third-party guarantees are a good tool for the seller,” said Christine Bourron, founder and chief executive of Pi-eX, a specialist art market analytics and finance company based in London. “They get rid of the risk of a work not selling, and that’s priceless.”
Last year, guaranteed works represented more than 40 percent of the estimated value at the Sotheby’s, Christie’s and Phillips evening auctions of Impressionist, modern and contemporary art, according to research by Pi-eX. Almost 90 percent of those guarantees came from third parties hoping either to buy the work, or share the profit above the agreed minimum price, Pi-eX’s report said.
The Pi-eX research, based on 250 evening sales from 2007 to 2017, showed that returns on third-party guarantees shrank in 2017, making them more attractive to sellers and buyers, rather than to 1031-minded investors.
Occasionally guarantors can hit the jackpot, such as in November when the painting “Salvator Mundi,” attributed to Leonardo da Vinci, sold at Christie’s for $450.3 million, about $350 million over the agreed minimum price.
But with competition between the auction houses pushing up valuations — and thus creating “growth,” or at least inflation — more guaranteed lots are selling to their guarantors, without any external bidding validating the price.
“There’s huge volatility in the market,” said Ms. Bourron. “The third-party buyers are taking the full risk of that volatility.”
For all the noise generated by one-off results such as that $450.3 million given by the Louvre Abu Dhabi and the $110.5 million paid by a Japanese online shopping mogul for a Jean-Michel Basquiat painting in May last year at Sotheby’s, art remains a market dominated by a relatively small constituency of extremely wealthy insiders, mostly in America.
“It’s a very risky asset. There are booms and troughs. There are high transaction costs and it’s easy to be taken advantage of,” said Doug Woodham, managing partner at Art Fiduciary Advisors, based in New York.
Mr. Woodham said that he has yet to notice a significant influx of wealthy new art investors, but that the Trump administration’s tax changes could potentially release more liquidity into the art market. Buyer enthusiasm, however, could also be curbed by the removal of 1031 exchanges for art, and by sharp new limits on deductions for state and local taxation, which particularly affects those based in New York. “Collectors are smart, tax-aware people,” Mr. Woodham said.
Perception and reality are very different things in the commercial art world. The reality is that it’s getting more difficult to make easy money out of art.