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Investing in Art: One Asset That Has Increased in Value Lately
by Alexander Green, Chairman, Investment U
Investment Director, The Oxford Club
Monday, October 27, 2008: Issue #877
In the October 6 issue of Forbes, columnist Claire Obusan tells the surprising story of Eli Broad:
“Broad should be a lot poorer this year. Worth $7 billion last fall, the insurance and housing maven saw his 46.6 million shares of AIG – received a decade ago when he sold his SunAmerica to the insurance giant for $18 billion – drop 70% between last summer and August 29, the day we priced the Forbes 400 (they’ve fallen much further since). That decline erased $2 billion from his personal balance sheet. But Broad’s net worth fell only $300 million. One reason: the soaring value of his 2,000-piece art collection. Comprising mostly contemporary pieces by artists like Jeff Koons, his collection was recently appraised at $1.9 billion, up 72% in a year.”
The article goes on to detail how several members of the Forbes 400 have hedged their fortunes during these volatile times by buying and selling and investing in art.
Of course, you don’t have to invest millions, or even tens of thousands, to buy contemporary art. It is readily available, often at a fairly reasonable cost, at your local gallery or art festival.
The Secret to Investing In Art
The secret to investing in art, however, is buying right. Most of us, myself included, are not experts at buying contemporary pieces of art below fair market value.
That’s why I often recommend that both novices and experienced art buyers use Mike Kuschmann, President of Fine Arts Limited.
Headquartered in Winter Park, FL, Fine Arts doesn’t have a gallery of artwork to sell. In fact, it doesn’t have a gallery at all.
Kuschmann is a “buyer’s broker.” That means he works for you, not the seller. If you visit a gallery, art festival or retail store and see a print, painting, sculpture or other piece you’d like to own, don’t pay retail. Mike will contact the seller on your behalf and negotiate a dealer’s price, saving you hundreds or perhaps thousands of dollars.
Mike has also saved his clients quite a bit in taxes, as well…
Investing in Art – Donating to IRS-Approved Charities
The 1995 Tax Act allows you to donate to any IRS-approved charity works of art at their fair market value, not at their cost basis. (Moreover, you can deduct the charitable gift’s fair market value on your return without being subject to the dreaded alternative minimum tax.)
As Mike explains, “I work closely with published artists and sometimes acquire limited edition prints or serigraphs at a substantial discount to the current market value. Clients of mine purchase them far below their published cost – often for just a few thousand dollars – and later donated them to a local hospital or university at their appraised value, allowing them to save thousands of dollars in federal taxes.”
The IRS requires you to hold these art investments for one year in order to donate them at their fair market value. And, of course, they’re beautiful. You may decide to just keep them.
However, most of his clients donate them to a local hospital or their old alma mater – and get a tax deduction for the charitable contribution. (Or Mike can handle the donation for you.)
For more information, feel free to contact Mike Kuschman at 800.229.4322 or 407.702.6638. He’ll send you a complimentary brochure packet, detailing his services and the tax savings available.
Over the next few weeks, I’ll be highlighting several other year-end tips for reducing your federal tax liabilities.
At the rate Uncle Sam has been spending money lately, you can bank on taxes going up soon.
It pays to plan today to keep your taxes low tomorrow.
Good investing,
Alex
Today’s Investment U Crib Sheet
- There are always some assets that “zig” while others “zag.” Having assets – like art – that aren’t correlated with the rest of your portfolio is important to reducing risk and improving returns. It means that regardless of the market conditions, there’s always something making money.
It’s the principle behind diversification and our Asset Allocation Model.
- Real estate has traditionally been a “safe haven” for investors to put their money during downturns in the market. And through our asset allocation model, we recommend having 5% of your portfolio in real estate – like real estate investment trusts (REITs). But the credit crisis and the resulting housing bust has made it difficult to know what properties are worth, much less profit from them. It makes REITs a difficult investment choice right now.
- Gold is another uncorrelated asset that many investors use to hedge against the effects of inflation. We recommend investors put 5% of their portfolio in precious metals, like gold. It’s currently around $727 an ounce – almost near its one-year low of $721. Gold has pulled back quite a bit from its high of $1,002 in February, and is starting to look like a bargain again.For more information on how to buy gold, and the best way to use this precious metal, check out Investment U Issue #818, Buying Gold: The Best Way to Use This Precious Metal.
- How to Save Thousands in the Art Market
- Tax-Managing Your Portfolio: 5 Steps to Cut Your Taxes, Plus 4 Tax-Break Options
- The One Investment That Pays Dividends Every Day
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Alexander Green is the Investment Director of The Oxford Club. A Wall Street veteran, he has over 20 years experience as a research analyst, investment advisor, financial writer and portfolio manager.
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