Managing Art as a Financial Asset

A few years ago, at the request of her accountant, a woman called David Sleeman, director of Winston Art Group in New York, regarding a painting from her mother’s estate that she had sold to a dealer after her mother’s passing.

The painting was never insured because the family wanted to avoid paying taxes on the item; thus, the daughter sold it discreetly to a local dealer and pocketed a check for $400,000. When tax season rolled around, the woman’s accountant inquired about the origin of this money, and the daughter explained where it came from. 

The accountant advised the woman to call Winston Art Group to ask for an appraisal for capital gains tax purposes. After a simple Google search, Sleeman discovered that the dealer had taken the painting to London and flipped it at auction for $850,000.

To avoid legal trouble, the woman had to re-open her mother’s estate and pay tax on the painting as it was valued by the Internal Revenue Service for the fair market value of the price paid at auction, in addition to legal fines. Just like that her $400,000 windfall disappeared, and then some—not to mention the stress of narrowly avoiding prosecution.

In today’s booming art market, it’s more important than ever to encourage proper management of art as a financial asset. According to The European Fine Art Foundation report issued on March 13, 2013, the value of the global art market in 2012 was about $58.4 billion[i].  The Capgemeni World Wealth Report of June 20, 2013 stated that fine art accounts for 16.9 percent of high net worth individuals’ investments of passion, the third largest investment group of this type behind jewelry, gems and watches (31.6 percent) and luxury collectibles (19 percent)[ii].

Before purchasing or selling valuable works of art, it’s essential to consult an art specialist. In today’s marketplace, inauthentic works of art are bountiful, even from sources once deemed reputable. As we have seen with the recent large-scale forgery case at the Knoedler gallery, inauthentic art can and does pop up in unexpected places. Seeking counsel from an objective expert, on authentication, as well as present and probable future values of a work of art, is imperative for every buyer and prospective buyer.

After acquiring a work of art, the buyer should also obtain an appraisal compliant with both IRS guidelines and Uniform Standards of Professional Appraisal Practice (USPAP) from a certified and objective source. Had the woman from the original anecdote been aware of the value of her mother’s painting, she would have known the dealer’s offer was a particularly poor one.

Just as important as seeking the initial appraisal is updating it on an annual basis. The values of the works of many post-war and contemporary artists are increasing significantly, even within a single year. In 2007, Mark Rothko’s “White Center” sold at auction for $72,840,000[iii]. Five years later, in 2012, a similar Rothko, “Orange, Red, Yellow,” sold at auction for $86,882,500[iv], more than a 19 percent increase on the previous value.

While certain sectors of the art market, like post-war and contemporary art, are currently increasing in value more dramatically than others, such as 18-19th century furniture, the art market, like the broader economy, is prone to changing quickly.

Protection also includes security. Stories of art thefts from both public institutions and private homes are in no short supply lately. From the Romanian thieves who stole seven works insured for a combined $24 million from the Kunsthal in Rotterdam last fall, to the recent capture of a jewelry thief on the upper east side who climbed fire escapes to break into private residences, the threat of theft is one to be taken seriously.

As a high-net-worth individual would manage any other asset, such as real estate or stock, art owners and their advisors must perform their due diligence before purchasing art, as well as maintain upkeep throughout ownership. 

While acquiring a work of art—be it from an estate, gift, purchase or other means—may seem like a simple exchange of property, valuable art comes with strings attached. Without proper paperwork—certificate of authentication, information on provenance, exhibitions and previous ownership, as well as verified transfer of title from one owner to the next—an individual possessing a piece of art could find himself in trouble. At a minimum, selling, donating or otherwise forgoing ownership of a work of art is hard, if not impossible, without proper documentation and an updated appraisal, and as seen above, lack of paperwork for art can lead to serious legal trouble for the owner.

Although art is oftentimes, and rightly so, a passion investment, in today’s market, it’s also an asset class that requires the same level of attention and care as any other.