SPE 1031

The depression era song, “Happy Days Are Here Again" was composed in 1929, music by Milton Ager and lyrics by Jack Yellen. This song is probably best remembered as the campaign song for Franklin D. Roosevelt's successful 1932 Presidential campaign. This song suggests an optimistic view of the world in an era when there was little to be optimistic about.

The good news is that, despite the “gloom and doom" surrounding the financial markets, the market for artwork and collectibles continues to be strong in the U.S. and overseas. According to Sotheby, a two-day sale of artwork by Damien Hirst on 9/18/08 set a new record of ₤111 million for an auction dedicated to one artist. Sotheby's stated that the previous record for artwork sales was set in 1993 for 88 pieces of artwork by Picasso, which sold for US$20 million.

And the Good News gets Better! Persons, who collect and own artwork and other collectibles and who sell these types of investments, can defer an estimated 35% to 40% in taxes by choosing to reinvest in additional artwork or other collectibles. This can be accomplished by treating the sale and purchase of artwork or other collectibles as a “Section 1031 Exchange". Assets in the “Artwork and Collectibles" category can include: lithographs, oil paintings, watercolors, sculptures, or other graphic forms of art, precious metal coins, and the like.

Does the acquisition of the artwork or other collectibles need to take place at the same time or with the same dealers? No. This transaction can be structured to take place over a period of time, which does not exceed 180 days. The purchase can take place either before or after the sale of artwork or collectibles.

What kinds of investments are “Like-Kind"? While Section 1031 Exchanges have been available for many years, the Internal Revenue Service has provided very little guidance or authority on what kinds of investment assets are considered “like kind". Other typical exchange issues include:

• Is the property sold considered to be “like kind" to the property purchased?
• Was the property held for investment or for sale?
• How are exchanges of multiple assets treated?
• What happens if the seller wants some cash out of the transaction?

The IRS National Office stated that they will not provide guidance on these issues unless “forced to do so on audit".

Due to the complexity of tax rules, Section 1031 Exchanges can be fairly difficult.