Art and Investment ñ Do They Go Together?
Transcription of interview with Amy Goldrich on July 2, 2012.
Douglas Goldstein, CFPÆ, Financial Planner & Investment Advisor
Amy Goldrich is an attorney with Lynn & Cahill in New York, who serve both commercial and
individual clients.
They have a very specific focus in part of their practice, which is on the art world.
Douglas Goldstein, financial planner & investment advisor, interviewed Goldrich on Arutz Sheva
Radio.
Douglas Goldstein: Is art a reasonable investment?
Amy Goldrich: Part of it is how you define reasonable, but generally speaking no, itís
not.
Art doesnít behave like other assets.
Itís hard to peg value.
Itís incredibly illiquid, very difficult to sell, and has a very high selling cost.
Thereís no fungibility really of the assets, unless youíre buying additions.
Itís hard to be able to know if this work is better than that work, if this artist is
better than that artist, or if this period of work of an artist is better than that period
in the artistís production.
Itís so difficult to make comparisons, and itís so difficult to sell it as an asset
that if youíre buying this as a pure investment, there are better places to go with your money.
I put out sort of a worst case scenario at the beginning, because different people are
comfortable with different levels of risks.
Some people are comfortable with more risks, some people can afford more risks, some people
really are looking for something that will help to diversify a portfolio, and for those
people, itís something that can be appropriate but you need to go into it with your eyes
open.
You need to be smart about it.
Douglas Goldstein: There are certainly ways of diversifying a portfolio.
My day job is that Iím a financial planner.
I work with people developing portfolios.
We deal normally with things like stocks, bonds, and mutual funds, but we spend a lot
of time talking about diversification, but Iím getting the feeling that maybe I should
say, ìBuy your stocks, bonds, mutual funds, and maybe piece of art and a lottery ticket
to boot.î Is it in the same class?
Amy Goldrich: I wouldnít generally put it in the lottery ticket class, because at the
end of the day, what makes art special, I think, is that if you buy it, you can live
with it and get a great deal of value out of it, a hedonic value.
You get pleasure from living with it.
You canít do that with a lottery ticket.
For people who are collecting certain types of art, and I collect art, which is how I
ended up coming in to this area of the law, when I look at a piece of art and Iím deciding
do I want to buy this, the question I ask myself is if the price of this work of art
is X, am I willing to basically throw that amount of money into a fireplace?
Is it okay with me, if this art is worth that much to me and worth zero to everyone else
in the universe, so that I will never be able to sell it?
If itís still worth it to me, if I still want it in that way, then Iíll go ahead and
buy it, but thatís my test and thatís the way it works for me personally.
Other people can have a different approach to it.
Theyíre willing to take a little more risk.
Theyíre willing to buy things that they donít necessarily love because they have done their
research, and they feel they can rely on the advice of the people that theyíve gone to.
There are incredible experts out there who can help you with this kind of thing.
If youíre going to be investing in art, you absolutely must do your research.
There are huge differentials and available information, and thatís a huge structural
problem in the industry, but itís something you can work around by making sure youíre
affiliating with the right experts.
Douglas Goldstein: Letís talk about the people investing, an art lover as you say.
Heíll buy something because itís worth it to him in the same way that someone else might
buy a car, or someone might buy a plane or collect stamps or watches.
Letís say someone is doing it as part of an investment.
Is his only hope really that someone is going to come along the way who is just more excited
about it?
Amy Goldrich: Yes.
If youíre buying it with an eye towards selling it one day, your hope and your belief is that
there will be somebody else who is going to be more excited about it and who is going
to want to buy it for more than what you paid for it.
Thatís not an irrational hope.
At the end of the day, whether itís gold, art, or something else, the value is just
a function of collective recognition.
If enough people believe that itís more valuable, then the money will go to it and youíll be
able to sell it for more than you bought it for.
Gold has more people enrolled in the idea of value.
This ounce of gold is the same as that ounce of gold, as another ounce of gold, because
itís gold and thereís uniformity to it.
You donít have that to rely on in art, so you have to make sure that youíre doing it
right, that youíre doing your research, that you understand the market, and that youíre
not moving in too quickly.
There are a lot of charlatans out there, and thatís part of the problem here.
In the securities world, you have licenses.
You have to take tests, you have to stay clean, there are all kinds of reporting and accountability,
but you get none of that in the art world.
One of the best pieces of advice that I got early in my involvement in the art world was
the admonition that nobody needs a license to do anything in the art world.
Somebody can call himself a dealer without ever having bought or sold anything.
All they need is basically a business card, maybe a website, maybe not a website and a
lot of chutzpah, basically because how am I going to know what heís bought or sold
in the past?
Douglas Goldstein: What does a lawyer who specializes in art do?
How do you help your clients?
Amy Goldrich: Itís really important, when it comes to buying and selling art, that you
do your due diligence.
Due diligence about the item that you want to buy, due diligence about the people that
youíre dealing with, and you also want to make sure that youíre handling the transaction
in a way that protects you, whether youíre the buyer or the seller.
For example, you can buy things at auction and a more policed marketplace.
Itís more open, and we can see past results.
We understand there are laws that govern auction houses.
Itís a little bit more out in the open.
Itís cleaner.
You can see who is bidding and whatís going on in the room.
With private transactions, you donít have that.
For example, with a private transaction, if Iím going to buy a painting thatís worth
$10 million, Iím not going to do that on a handshake, or just like have somebody send
me an invoice and Iíll pay for it.
There are a lot of things that go into evaluating making sure that youíre getting what you
think youíre getting.
Youíre buying a $10 million painting.
Is it authentic?
Is this the thing that they say it is?
Is it real?
There are issues of authenticity.
There are issues of if there is a clear title to it.
Thereís still a lot of artwork out there, for example, that was owned in Europe between
1920 and 1945, and a lot of that work couldíve been taken by Nazis.
If it was, itís still possible that that work, even though you paid good money for
it, could end up being subject to a restitution claim by the family that owned it originally,
and thatís still the case.
You need to know to ask these questions and to do the right kinds of searches and even
aside from the issue of restitution, does anybody have any financial liens against the
work, or is it owned by somebody else?
Douglas Goldstein: Is art something that you can put up to a bank as collateral for a loan?
Amy Goldrich: Yes, you can, and it can be used very well for that purpose.
There are art lenders, people who specialize in this, and you can absolutely borrow against
artwork.
Itís a really great way to free up capital and not have the tax consequence of selling
and to be able to leverage an asset thatís either going to be in storage or on your wall
or whatever.
You can generally borrow up to about 40% of the asset value.
Douglas Goldstein: You touched on something, which is the tax consequences of being an
investor both in terms of capital gains as well as state taxes.
How does that work?
Amy Goldrich: Itís interesting, because to be an art investor according to the U.S. tax
code, itís not enough just to buy a work of art and have it appreciate or hope that
itís going to appreciate.
Thereís a very detailed specific set of criteria that the IRS uses to judge whether or not
youíre an investor.
Whether youíre a collector or an investor, youíre going to be paying capital gains at
28% on sales, so itís not like stocks that youíre paying much higher capital gains.
But if you qualify as an investor under the U.S. tax code, you get to deduct a lot of
costs.
Basically, increasing your cost basis, youíre going to be paying tax on a lesser amount.
You really want to be treated as an investor for U.S. tax purposes, but to do that, you
have to be able to show that your investment purpose is your principal purpose or first
importance, that your first goal is the appreciation of the asset or income from that asset.
Another thing they look at is what is your record keeping like?
Do you have good collection management software?
Do you keep track of it the way you would keep track of your stock portfolio?
In other words, keep business-like records and use a business-like method for accounting,
for the purchases and for the collection.
Do you consult with experts on purchases when youíre buying stocks or making other investments?
Do you work with an investment advisor?
Are you working with a professional art advisor, somebody whose job is to help you find the
best possible pieces out there to be buying?
Other things they look at are if you are reading pertinent trade publications.
How much time do you devote to the collection?
Do you make an effort to display the collection publicly, which would enhance its value?
Are you actually selling works?
Are you realizing gains?
You canít be an investor if youíre not locking in gain.
If youíre just sitting and holding it forever, it doesnít look like youíre acting like
an investor.
That starts to look like somebody who is a collector and is interested in keeping it
around.
These are the kinds of things they look at.
Itís subtle, but itís important, and from an estate planning point of view, itís a
wonderful asset to have.
Again, youíre going to have your issues evaluation.
If your heirs are going to be inheriting the work from you, theyíll get a stepped-up basis,
the value on your date of death.
You have to go through a whole process to determine what is the value of the art on
the date of death, and you need to have a certified appraiser for that purpose.
Thereís no one appraiser who is great for every type of art or collectible you have
out there.
You want to find the right person for the type of art that you have, and the IRS can
occasionally challenge that valuation, but other people are able to use the assets well.
For example, they create charitable trusts that you will get the deduction for that,
you get all of that value put into a charitable trust, you can sell the art, you can do all
kinds of things with that money, and use that trust in the way that you can use other types
of charitable trust as part of your estate planning.
You can also make lifetime gifts and get the tax benefit of making a gift to qualify as
a not-for-profit institution during your lifetime, which is a great way to go as well.
There are lots of ways to be able to use it smartly, but you donít want to just go in
and buy something from the gallery down the street because that guy seems like a really
great guy.
There are elements, if you want to buy a watch that can come up, so you do need to be careful.
Douglas Goldstein: How can people learn more about your work?
Amy Goldrich: Iím with a firm called Lynn & Cahill, and you can find out more about
us at our website www.lynncahill.com, and if you Google me, youíll get other information,
some articles Iíve written, things like that, and Iím happy to hear from anybody who has
more specific questions.
Douglas Goldstein, CFPÆ, is the director of Profile Investment Services and the host
of the Goldstein on Gelt radio show (Monday nights at 7:00 PM on www.israelnationalradio.com.
He is a licensed financial professional both in the U.S. and Israel.
Securities offered through Portfolio Resources Group, Inc., Member FINRA, SIPC, MSRB, NFA,
SIFMA.
Accounts carried by National Financial Services LLC.
Member NYSE/SIPC, a Fidelity Investments company.
His book Building Wealth in Israel is available in bookstores, on the web, or can be ordered
at: www.profile-financial.com (02) 624-2788 or (03) 524-0942.
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