What You Need to Know Before Donating Art

Your Name on a Plaque Is Nice, but It Might Cost You More Than You Think

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For investors thinking about donating art, the most important thing to know is this: It isn’t as simple as…donating art.

The benefits of a donation are clear. The owners may have a fondness for a particular museum or university they have in mind as a recipient, for instance. And the ego gratification is powerful.

“There’s a legacy involved,” says Ralph Lerner, founder of Art World Advisors, which helps collectors determine what to do with their art. “You get your name on a plaque on the wall. You can take your grandchildren to the museum to show them the plaque.”

But ego aside, donors have a lot of factors to consider before making a decision. Among them: Selling may bring them far more money than they can save with a tax break for their donation. If they donate, the tax break varies depending on who the donation goes to and what the recipient does with it. And the recipient may have very different ideas from the donor’s about how the art will be displayed.

Running the Numbers

First, investors need to be aware of the difference, for their finances, between selling and donating. Peter Jason Riley, a certified public accountant in Newburyport, Mass., ran the numbers for a hypothetical U.S. taxpayer with an adjusted gross income of $500,000 who owns a painting appraised at $100,000 that she had purchased for $20,000.

What happens if she donates the painting? For donations of art, owners generally can claim a federal tax deduction of up to 30% of their adjusted gross income each year, making the limit in this case $150,000. So donating the painting to a qualifying museum would permit this owner a deduction in the current tax year of $100,000, assuming she hasn’t made other art donations totaling more than $50,000. (If donations in a given year exceed the limit for deductions, the overage can be deducted in following years, up to five if necessary, with the 30% limit applying each year.)

That means the tax benefit this year for the donor in this case would be $41,118, according to Mr. Riley.

If the painting was sold for the appraised value of $100,000, assuming a typical 15% sales commission to an auction house or art gallery, the seller would owe $31,372 in capital-gains tax, resulting in a net profit of $53,628, Mr. Riley says.

So the owner would end up $12,510 better off by selling than by donating. That doesn’t take into account the cost of an appraisal—typically $1,000 to $3,000—which isn’t always necessary for a sale but would be required in this case before the artwork was donated. The Internal Revenue Service requires an appraisal for donations of property over $20,000.

Selling won’t always be better financially. For one thing, selling might net far less than the appraised value of a piece of art. But this is an exercise owners should work through to get a sense of what they might be sacrificing by donating.

How Much of a Deduction?

Art owners also should be aware that their tax break for a donation will depend on several factors. In some cases, donors can claim a tax deduction based on the appraised value of the art. But in others the deduction is based on the price the donor paid for the art, which can be much lower than the appraised value.

One factor: The donor’s deduction can only be based on the appraised value of the art if the recipient qualifies as a public tax-exempt organization. If the recipient is a private tax-exempt organization, the deduction is based on the price the donor paid.

A public tax-exempt organization is one that receives at least one-third of its support from the general public; museums, universities and other schools, hospitals and churches are among the institutions that generally qualify. A private tax-exempt organization doesn’t rely on funding from the public. The Ford Foundation is one prominent example, and there are many private foundations funded by wealthy individuals.

But that’s not the only distinction the IRS makes. A deduction can’t be based on the appraised value of the art unless the donation is related to the recipient’s mission. Few recipients except museums are likely to pass that test. For donations to recipients that fail that test, the deduction is based on what the donor paid for the art.

Donations that clear both those hurdles face another one. If the recipient sells the art within three years, the amount deductible by the donor reverts to the purchase price instead of the appraised value—potentially leaving the donor with a bill for back taxes.

One other tax-related issue for those who deduct the appraised value of a donation: The IRS subjects appraisals to review by its Art Advisory Panel, which is composed of art dealers and museum curators. And the panel often makes substantial adjustments to appraisals.

Taxpayers may be subject to substantial penalties if the IRS finds that the donated items are significantly overvalued, so it’s imperative that the appraiser has a legitimate basis for arriving at a valuation, such as comparable sales. 

Donation Negotiations

Finally, it isn’t only the IRS that can take some of the fun out of a donation. Recipients can be prickly about how the art will be displayed—or even if it will be at all.

In this case, though, donors have some leverage. Art experts encourage donors to negotiate the terms for their gifts before turning over the art. For instance, the donor might demand that the art be on display for at least three months every three years—or on permanent display.

Or in the case of multiple works being donated, owners might demand that the art be given a special exhibition and be written up in a catalog, and that the pieces must be kept together and none of them can be sold. A donor can also demand perks like free lifetime membership at the highest level for family members.

If a potential recipient balks at a donor’s terms, the owner can look for a more pliable recipient. But donors who have their hearts set on the most prominent institutions as recipients should expect less flexibility.

“I encourage people to donate to universities and smaller museums,” says Susan Brundage, director of appraisal services at the Art Dealers Association of America. “They are thrilled to get something that might be seen as minor by the Met or the Modern or the Whitney.Those larger museums will only put most donations in their basements, never to see the light of day.”

And no plaque for the grandchildren to see.