As tax hike headlines continue to roll in, we are aware of many clients’ keen attentiveness to the issues surrounding potential relocation to lower tax jurisdictions. In addition to the more general considerations that affect any relocating taxpayer, art collectors additionally need to consider how they will manage their art collections in connection with such a move. We have outlined some key points below.
Use tax considerations
If any artwork in the collection will be moving with you, use tax may be due on the artwork when it enters the new state. Although use tax is most typically applied when a buyer purchases artwork in one state (or abroad) and takes delivery in another state, the rules are designed as a very broad net, intended to top up each state for any sales tax that would have been paid had you purchased the artwork in-state. Therefore, use tax is likely to apply to a relocation of artwork unless either the state does not have a use tax or you qualify for a state-specific exception. Additionally, most states offer a credit up to the amount of any sales or use tax you paid to another state. Certain states offer a blanket use tax exemption for property moved in connection with a home relocation or for property that was acquired at a time before you became a nonresident. However, because the rules and exceptions vary widely state-by-state, it is crucial to review the applicable rules and ensure that your documentation soundly reflects any position you may take with respect to qualifying for a credit or exception, as we are anticipating states to escalate their enforcement of sales and use tax rules due to revenue shortfalls caused by the pandemic.
On the other hand, if the artwork is not moving with you, and you wish to move it into storage rather than leave it in your now-secondary home, use tax may be due in connection with the movement of your art into an out-of-state storage facility. For this reason, it is important to consider the effective use tax rates in effect in the state where the storage facility is located.
Income tax considerations
If you are considering selling any artwork in your collection in the future, it may be worthwhile to err in favor of moving that artwork with you to the lower-income tax state where you intend to become a resident. Many states continue to tax nonresidents on capital gain derived from sales of tangible personal property (such as artwork) where the gain is attributable to ownership of the property within their state. Under the right facts and circumstances, moving your artwork to a new, lower-tax state in connection with your relocation may be sufficient to break the artwork’s tie to the old, higher-tax state, ensuring that any capital gain realized on the sale is not considered attributable to your ownership of the property in the old, higher-tax state. This analysis is fact and circumstance specific and should be discussed with your legal advisors prior to any relocation.
Insurance, security, and art financing considerations
If you are relocating the artwork, whether to your new home or to a storage facility, be sure to review any applicable fine art insurance policies and/or fine art lending collateral agreements for the required notifications to the insurance company and/or bank. There may be additional questions about the security, display, storage conditions of the new location where the art will be kept. If you are obtaining homeowner’s insurance for a new home, you may wish to consider adding any artwork that will be kept in that home to the policy at the same time.
Alternatively, if you are leaving the artwork in your prior primary residence, you may need to provide notice to your insurer and/or lender that the home will no longer be used as your primary residence, as this is likely to affect the security, display, storage conditions of the artwork. You should consider how the security and condition of the artwork will be monitored while you are away from the home.
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