Some of my clients have found themselves in a situation where they are low on cash but rich in art. The solution seems simple enough; sell your art. The art market is strong and one could live off of the proceeds for years. Though selling may seem to be an easy choice. It is not. Collectors are emotionally attached to their art. Selling can cause great anguish for them.

Another solution and one that might be more advantageous financially, is to take out a loan with your art as collateral. Collectibles held for one year or longer are currently taxed at 28%. If you bought a Picasso for $100,000 in 1942 and sold it for $20,000,000 today, you would pay $5,572,000 in capital gain tax. On top of that, you would pay state tax and a commission to the auction house. Your proceeds are practically sliced in half.

Taking out a loan against your art allows you to keep the art on your premises and also (if desired) loan it to a museum for a specified period of time and then it is sent back to your collection. Your heirs will pay an inheritance tax on the remaining proceeds, which they would have to do any way. At this point, all taxes have been paid and the heirs can sell the painting incurring only sales commission. Heirs avoid capital gains (in most cases) because the painting was marked to present value when taken into the estate.

Questions about art as collateral? I’m happy to help.