Donating Fine Art to Charity

After watching an episode of Antiques Road Show, you may look at that beautiful painting on the wall and wonder if you should donate it to a museum for the world to enjoy. Or you might want to transfer valuable artwork out of your estate before the lifetime exemption amount—over $12.06 million per taxpayer—reverts to pre-2017 levels when individual provisions of the Tax Cuts and Jobs Act sunset at the end of 2025.

Valuing fine art can be tricky because artwork is non-fungible—a one-of-a-kind asset that cannot be copied. It requires more care to value this unique type of asset than fungible assets, like stocks or currency. The fair market value of fine art hinges on authenticity, market trends, the artist’s renown, the work’s art-historical significance, its condition, and documented place of origin.

IRS Art Advisory Panel

Experts at the IRS Art Advisory Panel review taxpayer art appraisals over $50,000, sometimes reducing the amount of an allowed charitable deduction for artwork transferred to a charity. The IRS Art Advisory Panel has also been known to raise the fair market value of work transferred to heirs. When Ileana Sonnabend died in 2007, her estate appraised the value of Robert Rauschenberg’s Canyon at $0 because the well-known 1959 painting included a taxidermied eagle “flying” out of the canvas and was therefore deemed unmarketable under the Bald and Golden Eagle Protection Act. The IRS Art Advisory Panel disagreed and raised the appraisal to $15 million. The Sonnabend heirs appealed, resulting in a further adjustment of the appraisal to $65 million, along with a reported $41 million in tax and penalties. Eventually, the heirs and the IRS settled on donating Canyon to the Museum of Modern Art without any tax deduction and no taxes owed.

Assuming you want to donate artwork that has appreciated during your lifetime to qualify for a tax deduction based on the work’s current fair market value, you must meet the following criteria:

• The donation must be to a public charity formed in the U.S., as documented by the charity’s tax exemption letter from the IRS.
• You must have owned the artwork for more than a year, and you cannot be the artist who created the work or an art dealer.
• The donated art must be used in a way that relates to the charity’s mission, like displaying the work in a museum’s collections. If the charity’s original intention is to sell the work, the deduction will be based instead on the less valuable cost basis for the artwork.
• The charity must agree to keep the work for at least three years for the donor to receive a charitable tax deduction based on fair market value.
• Donors must obtain and report a qualified appraisal on IRS Form 8283, along with the donor’s income tax return. This is usually where complications occur.

Find a Qualified Appraiser

The responsibility of securing a qualified appraisal of donated or transferred artwork falls on the owner because most charities do not have the resources to conduct appraisals or display the items. A qualified fine art appraiser should adhere to the Uniform Standards of Professional Appraisal Practices (USPAP), the only set of standards that governs the appraisal profession. In fact, the IRS requires that appraisals be completed by USPAP-compliant appraisers.

Must be Appropriate for the Institution or Collection

In addition to a qualified appraisal, the artwork or collection must also be appropriate for a particular institution. Most museums have a collections policy that spells out what they collect, interpret, and exhibit, and they will not accept items that fall outside of their collecting mission. Reputable museums can produce this policy in writing upon request. If the item falls within the collecting mission, then the next step is to consult with the curator, who will decide whether it fits within the rest of the collection. If a museum accepts an item, the donor should expect to pay for an appraisal as part of the donation, partly because of the tax benefits connected with making the gift.

Donating vs. Selling to a Dealer

Donating fine art to a charity can be more appealing than selling it. Selling requires hiring a specialist because an auction house specializing in the right niche will bring the items to the attention of a knowledgeable audience. Besides the commission retained by the auction house and appraisal costs, any long-term gain realized on the sale of art and collectibles is subject to a 28% long-term federal capital gain tax rate and a 3.8% surtax on net investment income for joint filers with modified adjusted income above $250,000. Obviously, a 31.8% tax on long-term capital gain is significantly more than the 20% top federal tax rate for long-term gains realized in the sale of financial assets.

In addition to the limitations on charitable donations of fine art outlined above, the relative value of the charitable tax deduction for such a donation hinges on multiple tax-related factors. The deductibility of fine art donations is subject to limits based on the type of organization that receives the donation and whether it will use the artwork as part of the function for which it received tax-exempt status. This determines what percentage of your adjusted gross income (AGI) can be used to calculate the charitable deduction.

For example, the tax deduction can be limited to 30% of your AGI, and any excess charitable deduction that cannot be deducted in the current year can be carried forward for only 5 years. Consequently, it is important to run multi-year tax projections to ensure that no charitable tax deduction is left unused. Such multi-year tax planning could also help determine whether additional ordinary income needs to be created to make the charitable donation more valuable instead of offsetting income that is taxed at a lower rate, like long-term capital gains realized from the sale of stocks. Pairing a Roth conversion with a charitable donation might be one way to achieve this.

If you own valuable artwork that you are thinking about donating or selling, Savant can help you identify the most valuable strategy based on your unique tax planning and estate planning considerations.