Art has the ability to stir our emotions, not unlike music, creating reactions that may be universal as well as uniquely personal. Great art has been celebrated, enjoyed, and even coveted, but could it also have a more practical purpose? For many investors seeking to diversify portfolios for financial or personal reasons, the answer is “yes.” Traditional investment portfolios are often associated with stocks, bonds, and real estate. And, as covered in an earlier article, wines are also present in some investment portfolios. Artwork is another candidate for those hoping to see gains. The trick is to develop a plan and follow it faithfully.
The first step is to determine why you want to acquire artwork. If viewed strictly as an investment, asset appreciation would be an expected goal; this would also be a positive outcome for artwork collectors, beyond the pleasure of owning the art. Because art created by the masters rarely depreciates in value, it can also represent a tempting way to “store” cash, compared to stocks. Another motivator could be a desire to preserve and protect great works of art for the enjoyment of future generations.
Paintings are subject to decay and damage from UV exposure, the elements, and irrational people. As an example of the care routinely exercised to protect these works when they are open to viewing by the public, the “Mona Lisa” is protected by a sheet of bulletproof glass, which precaution proved very beneficial when a madman recently attempted to deface da Vinci’s 16th-century masterwork by applying a handful of cake. The painting had previously been stolen by a museum staffer in 1910, and was subjected to an acid attack in the 1950s.
Artwork can also be acquired for personal use in the hopes it will grow in value, but it’s important to recognize that tax laws are quite different for collectors than they are for dealers or investors. To the Internal Revenue Service (IRS), an artwork dealer is a person who actively buys and sells pieces of art. This status is subject to how much art is purchased, the motivation for the purchase, and the person’s overall sales efforts and activity.
The IRS defines an investor as a person acquiring artwork for the express purpose of, and a documented history of, reselling the items at a profit. To the IRS, a collector is a person who acquires art for personal enjoyment, making it a bit of a hobby. In other words, you can’t buy a Rembrandt, hang it on the wall for the next 20 years for your personal pleasure, and have the IRS allow you to treat it as an investment.
Unlike dealers or investors, a collector can’t typically deduct expenses incurred in the acquisition or the maintenance of the art, but they may be able to enjoy some tax benefits in the event they donate the art or when it is sold. There may also be advantages available to an individual loaning a masterwork to a museum or other institution for exhibition in terms of security and preservation, but in this and all other instances, always refer to a qualified, experienced tax adviser for specific advice and information prior to purchasing artwork as an investment.
While some investors may prefer to specialize in the works of a particular artist, there is certainly no reason not to have a diverse portfolio. When viewed strictly as an investment, the acquisition cost and potential for appreciation should be among the primary motivators. Investment-grade artwork can be acquired via auctions such as those organized by Sotheby’s and Christie’s, or from museums, universities, corporate owners, or private owners.
However, when acquiring a masterwork, care must be taken to ensure its authenticity; just as is the case for high-end watches, in the art world so too do forgeries abound. Buying from a reputable auction house provides some level of reassurance, but in the 1990s, British artist John Myatt used his considerable skills to create hundreds of forgeries of works, some of which were sold by Sotheby’s, whose very knowledgeable personnel were completely unaware the art was forged.
A happier example is that of da Vinci’s “Salvador Mundi” painting. Acquired for a mere $60 in 1958 under the assumption it was a forgery, it later proved to be authentic, selling for $450 million at auction. Accordingly, prior to completing a purchase of a masterwork, it’s strongly advised you have an expert or two examine the artwork. Another reason to have it examined is to avoid inadvertently purchasing stolen art, which could result in the asset being seized and returned to its rightful owner.
Just as is the case with fine wines, masterworks must be protected, which may involve storage in a vault, UV and atmospheric exposure countermeasures, and security systems. Insurance is also a must, working with a provider with extensive knowledge of artwork and its valuation.
Investing in art is not for everyone, but when approached with knowledge and a bit of judiciously applied skepticism, it can be a fruitful way to preserve masterworks while preserving and possibly enhancing one’s net worth in the same stroke.