Is Fractional Ownership in Artwork a Good Investment for You? by Lewis Kevelson, CPA
Fractional ownership of high-value assets, such as private airplanes, yachts and vacation homes is nothing new. However, in today’s burgeoning sharing economy, this business model has made it affordable for the masses to not only buy access to items once reserved for the wealthy, but they also have the potential to yield significant returns from their initial investments in those assets.
The Basics of Fractional Ownership
In the traditional fractional interest model, several parties would purchase individual stakes in an asset that they generally could not otherwise afford to buy on their own. Each owner shares the benefits and rights to use that asset as well as the risks of ownership. For example, a fractional owner could buy access to a private jet, fine art, jewelry, rare coins and cars.
The New Model of Fractional Ownership of Art
Over the past few years, there has been a proliferation of online platforms selling fractional ownership in alternative assets, including fine art. These companies drastically reduce the costs of ownership in artwork, which tends to hold its value and has the potential to appreciate and yield significant return on investment over the long term. In that sense, fractional art companies are opening the doors for a wider audience of potential investors to test the waters in an asset class that would traditionally be beyond their financial reach.
Therefore, just as investors can buy individual shares in a public company for a few dollars, they can now own a tiny fraction of a painting by Picasso or a sculpture by Jeff Koons without risking too much capital upfront or over the term of the holding period, since the fractional art company typically handles the care and maintenance of those works of art.
According to Deloitte’s 2019 Art & Finance Report and the Artnet Index for the Top-100 Artists, the value of art as an asset class returned 8 percent compound annual growth between 2000 and 2018, compared to the performance of the S&P 500 which saw annualized average returns of 5.9 percent over the same period. Yet, this data can be misleading when considering that investments in art come with some unique challenges and risks.
For one thing, art is an illiquid asset and is therefore not easy to sell and convert to cash in a pinch. Moreover, the value of art can fluctuate regularly based on a wide range of factors that are outside the control of the actual owner, including the price a potential buyer is willing to pay for a piece of art. Therefore, there is no guarantee that art will appreciate or that an eventual sale will result in a profit.
An additional consideration for investors is that fractional art companies typically charge transaction fees and commissions for their roles facilitating sales and managing the upkeep and exhibition of those pieces. For many, these fees are worth the expense to reap the potential rewards of entrée into the art market, including diversification of investment portfolios, while avoiding the responsibilities, time and effort required to manage those assets. However, when sharing ownership in art, investors do not have the benefit of showcasing those pieces in their homes for their own personal enjoyment.
Tax Implications of Owning a Fraction of a Piece of Art
Following are eight critical questions individual investors should ask and discuss with their accountants and financial advisors before purchasing fractional shares of artwork:
- What is the length of fractional ownership commitment?
- What are my legal responsibilities and what documents will I be required to sign when buying a fractional share of art?
- Does my fractional ownership qualify me as an owner of for tax purposes?
- Is my purchase subject to sales tax?
- What are the management fees charged by the fractional ownership company, and do those fees rise based on the amount of ownership?
- Are maintenance and storage fees paid to the fractional ownership art company tax deductible?
- Do I have the power to sell my interest to a third party or must I relinquish my shares to the fractional art company?
- What happens to my fractional ownership if and when I pass away?
About the Author: Lewis Kevelson, CPA, is a director with Berkowitz Pollack Brant’s International Tax practice, where he helps high-net-worth families, entrepreneurs and business owners structure transactions to comply with domestic and international tax matters while building and preserving wealth. He can be reached at the firm’s West Palm Beach, Fla., office at (561) 361-2050 or email@example.com.