One curious aspect of 21st Century life is that billionaires are nuts over modern art paintings, while non-billionaires are not. This is different from, say, 1961 when Norman Rockwell painted a gorgeous faux-Pollock for the cover of the Saturday Evening Post. There was a broad continuum of interest in modern art then, but today there is a sharp disjunction between people who can afford to buy certified modern art and people who can’t.
Today, the rest of us generally don’t go out and buy posters of the stuff the billionaires are investing in. Contemporary art is just something billionaires are into.
One piece of the puzzle, apparently, is a lucrative tax break on federal capital gains taxes if you roll your winnings on buying a painting over into buying other paintings. You can evade paying capital gains taxes for the rest of your life if you keep buying more paintings. But if your first score was a painting, you have to keep buying paintings.
From the NYT:
Investors can avoid all capital gains taxes by holding the artwork bought with money from a prior sale until they die or by donating it to a museum, two strategies that have made the tax break — also known as a 1031 exchange after the section of the tax code that permits it — an attractive tool in estate planning.
Other investors sell and repurchase a series of works of escalating value without paying tax until an ultimate sale many years down the road, a process that some liken to receiving a no-interest loan from the government.
“If you are doing five transactions over 25 years,” Mr. Baer said, “each time buying something more expensive, each time you don’t pay the capital gains tax on the way. At the end of the day you are way ahead.” …
To avoid taxes, the proceeds from one sale must be rolled into the purchase of a “like-kind” item, a categorization that the Internal Revenue Service has yet to fully define but that most experts advise allows exchanging a painting for another painting, for example, but not a painting for a sculpture. These rules mean that many investors own their artworks via separately established companies and store them in art warehouses away from their homes.
And the exchange, which has to use the help of an independent intermediary, must be completed within 180 days.
So this means the art (painting) bubble stays permanently inflated (at least until a catastrophic popping), because rich guys who made money in paintings in the past have to keep plowing their winnings back into buying more paintings, or they’ll have to write a big check to the IRS. They can’t reinvest their capital gains into baseball cards or dinosaur fossils or, God forbid, a factory.
They just have to keep playing the painting game. You can check out anytime you like, but you can never leave.