Apples and Picassos

“Like-kind” art trades may bring tax benefits, but only if carefully executed.

OUR NEW CLIENT Joe was a Wall Street trader and avid collector
of works on paper. Although not all his trades panned out”
(Iceland didn’t want any submarines because it has no navy),
Joe’s tax bill was still high. When he came to us, he reckoned he
had found the perfect solution: “like-kind exchanges” of his
art under Section 1031 of the Internal Revenue Code, which
he thought would permit him to defer taxes indefinitely while
allowing him to trade his works for other assets. Although
we see many proposed like-kind exchange transactions, those
that are done correctly in the art world are about as rare as
Icelandic admirals—and so it was with trader Joe’s.

His first brainstorm was to swap some Warhol lithographs
he had inherited for a two-bedroom condo in New York’s
Tribeca neighborhood. The art and real estate were both
worth about $2 million, so he presumed the exchange would
have no tax consequences.

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