Exchanging Art and its Like-Kind
How Section 1031 of the U.S. Internal Revenue Code can aid the art world in a time of need
Last year I wrote an essay for school attempting to answer the following prompt: In your opinion, what event/trend/person has had the biggest impact in the art world in the last 50 years?
While brainstorming my response I came up with a number of potential answers. Art fairs, Instagram, and Larry Gagosian were just a few that came to mind.
What I instead settled on was a less observable phenomenon, but potentially more influential section of the U.S. tax code — 1031 Exchanges.
Also known as “like-kind” exchanges, this section of the tax code, which was originally intended for the use of real estate, had allowed owners of artwork to defer payment of potential capital gains tax incurred through the sale of works of art that had appreciated in financial value.
Over the last 50 years, this economic incentive is notoriously known for not only further commodifying art, but also predominantly benefitting the top-end of the art market and those who dwell there.
However, what is not often discussed is the unprecedented growth it is likely to have helped fuel in both upstream and downstream art services during that time.
The Tax Cuts and Jobs Act passed under the current Trump Administration in 2017 and took effect in 2018
The exclusion of art from the incentive under the 2018 Tax Cuts and Jobs Act had already been felt reverberating through the art market even before COVID-19 turned off the faucet.
According to Clare McAndrew’s latest Art Market Report, global sales of art and antiques were down 5% year-over-year in 2019.
Fast forward to 2020 and some dealers are estimating a potential decline of 70% in private gallery sales as a result of COVID-19 related shutdowns. It’s my opinion that requalifying art for use of the 1031 exchange may provide the art world ecosystem a much needed stimulus injection in a time of great need.
The business of art has grown rapidly in recent decades and the arts community is widely seen as a key factor to the development of urban centers small and large.
That is why it is not surprising to see countries like the UK and Germany establishing emergency relief funds specifically earmarked for the arts. Putting money directly into the pockets of those who need it most may be the most efficient form of support for the arts.
Unfortunately it is not likely to garner political support in the U.S. from an administration that has repeatedly attempted to defund the National Endowment for the Arts (NEA) since taking office.
And because artists predominantly work on a contracting basis with galleries, they are more reliant on the sale of their artwork and do not benefit from certain stimulus programs such as the Paycheck Protection Program.
Philip Guston’s “Early Mail Service and the Construction of Railroads” tempera mural originally installed in the Commerce, Georgia post office and commissioned by the WPA in 1938
Others have argued for the creation of, and some lauded individuals are even attempting to recreate, a public works agency in the vein of the Works Progress Administration (WPA) formed under Roosevelt’s American New Deal.
However, the hopes of establishing a new version of the WPA that is large enough to provide significant relief to the cultural sector seems improbable while republicans and democrats cannot seem to come together on a long overdue infrastructure bill.
This all leads me back to the 1031 exchange.
What typically goes under-appreciated with 1031 exchanges is that the tax benefit, by definition, required the seller of an artwork to identify and replace the original property with one or more artworks or ‘like-kind’ assets.
In doing so, collectors are incentivized to keep their money in the art market, which in turn trickles down to various businesses, services, employees, and artists who make up the art world ecosystem.
For a lack of better words, turnover makes the world go ‘round and, whether we like it or not, the 1031 exchange enables artists to expose their work to a greater number of potential collectors and the businesses that support them to keep their lights on and doors open.
Was it curious to see the 1031 exchange revoked for the use of all personal property besides real estate under a President whose net worth is backed by real estate? No, of course not.
What was more interesting is the fact that the President’s Treasury Secretary, Steven Mnuchin, is extremely familiar with the role that 1031 exchanges presumably played within his father, Robert Mnuchin’s, gallery operations and collecting activities for years.
So when it was reported that an envoy of top art market players was recently received at the White House by Mnuchin and Ivanka Trump to discuss what efforts could be taken to support the art economy, it makes sense that the 1031 exchange was a confirmed option on the table.
Ivanka Trump and Treasury Secretary Steve Mnuchin talk before the arrival of President Donald Trump to speak about tax reform in 2017. Photo: Reuters
Don’t get me wrong, I am the first person to argue for a more direct form of economic support for the arts in the U.S. — I’d love to see increased funding and grant making from the NEA, or a WPA style program put in motion.
Additional tax advantages for the wealthy is not necessarily what our society needs at this time. However, I also recognize that those other solutions may not be politically attainable at the moment.
Time is running out for so many in both the for-profit and non-for-profit art world. If something like the 1031 exchange can at least plug the holes in this ship until a more sustainable alternative presents itself then I am all for it.
Like the art critic, Jerry Saltz, said in a 2016 blog post boycotting the Mnuchin Gallery, “Art is always looking to find a way to get at rich people’s money. Life is a paradox. Art contains multitudes.”
Originally published on medium.