The Obama administration and other politicians have proposed eliminating the use of “like-kind exchanges” to prevent art investors from deferring taxes on artwork they hold as investments. The reasoning is that “the rich” should not defer the 28 percent capital gains tax imposed on the sale of artwork. This is just another example of using the tax code to promote social engineering.

Artwork, and other collectibles, are seen as luxuries only owned by the rich, who do not deserve any tax breaks because they do not pay their “fair share.” In fact, the vast majority of artwork and collectibles are owned by middle-class working people who have collected or inherited art and other collectibles over the years.

The federal tax code treats the sale of stocks held for longer than one year as long-term capital gains. The profits are taxed at a lower rate than stocks held for shorter durations.

Profits from the sale of commercial real estate are not taxed if the seller uses a 1031 exchange and the profits are then rolled into a new commercial property investment within the specified amount of time. Profits from the sale of a residential property are not taxed if the profits are rolled into a new residential property. Also, when selling a residence, the first $250,000 of lifetime accumulated profits for an individual or $500,000 for a couple is not taxable.

Social engineers, however, now see owning collections as somehow less useful to society than owning, say, a personal residence, commercial real estate or owning stocks.  That view seeks to justify why you can’t avoid capital gains taxes on the sale of art like you can on the sale of your house. It also seeks to justify why gains from the sale of art are taxed so much higher than from the sale of stocks, 28 percent versus 15 percent.

The unintended consequences of such social engineering by means of the tax code are manifold. The 2008 financial collapse was attributable in part to perverse tax and regulatory policies that encouraged lenders and buyers to make unwise decisions, the result of which was many homeowners unable to keep up with mortgage payments far beyond their means.

The high taxes associated with selling art, and the high commissions on sales ranging from 10 to 25 percent, is driving not only the middle class buyers out of the market, but also the dealers, galleries, and support services that cater to those art buyers. Finally, the inflated expectations of fantastic returns on art and collectibles drives up the valuation of art in estates, and, consequently, the taxes paid on estates. In other words, the 1031 exchange benefits both our economy and tax collections by the government.

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