As the auction hammer fell at Sotheby’s in New York last week, a painting by Jean-Michel Basquiat fetched a record $110.5 million. Now another hammer will come down: the tax man’s.
The heady price may give the seller, Lise Wilks, an equally heady capital gain of about $85 million, which means she may owe about $37 million, according to tax experts.
Her late parents bought the work for $19,000 three decades ago.
Collectors can face steep taxes on successful investments.
There is the maximum 28% federal capital gains rate for collectibles, compared with the top rate of as much as 20 percent on securities. A 3.8 percent additional levy on investment income is applied for top earners.
Reside in New York City?
That’s another 12%.
Figuring Wilks’ exact tax bill or cost basis is impossible without knowing whether the piece was a gift or passed to her through the parents’ estate, according to Laura Peebles, a retired certified public accountant who’s a senior fellow at Bloomberg BNA.
One way to determine the cost basis is to use the value of the work on the date of a parent’s death, assuming it was included in that parent’s taxable estate, Peebles said. Wilks’ parents, Jerry and Emily Spiegel, both died in 2009.
The auction record for Basquiat at the time was $13.5 million, according to Brett Gorvy, former global head of postwar and contemporary art at Christie’s.
While Sotheby’s achieved the $110.5 million Basquiat record, the result included their commission of $12.5 million on top of the $98 million hammer price.
Taking the work’s $13.5 million value as an assumed cost basis, Wilks’ gain would be about $85 million. Her estimated federal tax: $27 million.
Add about 12% for New York City and state tax and that’s another $10 million.
Wilks and her representatives didn’t return phone calls and emails for comment. Wilks sold the Basquiat anonymously as is custom for many wealthy art collectors.
There are strategies to offset such a big gain, including:
Art investors can defer capital gains taxes by taking advantage of what’s known as an Section 1031 exchange by using the net gains to purchase more art. Collectors aren’t eligible for this deferral so those who use this technique should be prepared to document their status as an investor, according to Peebles, who specializes in estate, trust and charitable planning.
Gains can be offset by donations of cash or art during the year of the sale, or carried forward from prior years. If a collector donates art to a museum, for example, the donor gets to deduct the appraised value.
Donations to public charities of cash and other non-appreciated property may offset up to 50% of the donor’s income. The limit is 30% for certain private foundations. The deduction is also phased out based on the donor’s income.
“If they are lucky enough to have a bonanza like that, they should plan on becoming more charitable,” said Ralph Lerner, an attorney who has negotiated major art transactions. The alternative is giving it to the government, he said.
Wilks has embraced philanthropy. The Lise and Jeffrey Wilks Family Foundation reported $3.5 million in assets and made $301,650 in grants and gifts in the year ended July 31, 2015, according to the organization’s latest tax filing on GuideStar.
For those thinking about selling their art, there may be another strategy altogether: Waiting to see if President Donald Trump is successful in overhauling tax rates.
Experts advise caution on that.
“Your taxes might be lower but what happens if the art market shifts?" said Shari Levitan, a partner at the law firm of Holland & Knight who advises wealthy families with substantial art collections.
“You never know if you are at the height of the market until you are on the other side sliding down.”