The art of investing in art

Money doesn’t grow on trees, but you can hang it on your wall. Art has turned heads for centuries, but with valuations surging in recent years, some investors now admire their paintings as much for their ability to boost portfolio returns as they do for being a showpiece.

In 2022, art was the top-performing luxury asset, surging almost 30% that year and up more than 90% over the past decade. While the sale of billion-dollar collections and rare pieces valued in the millions can skew activity in the luxury market, you don’t need a Banksy or a Jackson Pollock adorning your home or office walls to consider yourself an art investor.

Still, before you grab a paddle and head to an auction, there are a few things to consider before becoming a serious investor in this market.

What to know before you invest in art

Like any investment, buying art starts with homework. Alexander Jansen, Investment Strategist at BMO Family Office, says the art market can be difficult to predict and identify trends. Having the appropriate network can help, says Jansen, but you will likely want to enjoy the art first.

Lydia Abbott, Vice-President, Co-owner and Partner of Cowley Abbott, a Toronto-based art auctioneer, is one person high-net-worth investors turn to for all things related to the art scene. She can help people take advantage of trends, but, she adds, the market is nuanced and can be unpredictable. “It’s a very tough space to call correctly and you need a lot of money to do so,” she says.

That’s why it’s most important to find pieces you connect with first and foremost. “Enjoy the art and then think about how it fits into your investment portfolio,” says Abbott, while she sits in front of an original landscape of Georgian Bay by Frederick Varley, a member of the famed Group of Seven, and a pensive self-portrait by Quebec historical artist Marc-Aurèle de Foy Suzor-Coté. She also points out that while marquee pieces fetching millions at auction grab headlines, most collectors are looking at art in the $5,000 to $50,000 range.

How to value art

Valuing art can be an art in and of itself. In the fall of 2013, Banksy, the elusive, high-profile graffiti artist, performed a thought experiment in New York’s Central Park to show how subjective the value can be by setting up a simple street vendor with a few of his original works. Most ignored the display, but the few who stopped to buy a canvas reportedly spent as little as US$60 for a piece that would sell for around US$40,000.

It’s stories like this that make valuations appear arbitrary to outsiders, but there are some common factors that can influence the numbers. There’s the obvious, like the artist’s name, the medium and the size, but details like how a piece was acquired, who may have owned it in the past, and whether there are other details to back up the piece’s history can also influence the valuation, explains Abbott. Comparing what other works by the same artist have sold for can be another good barometer of value, provided it’s from the same period and style.

When you buy original artwork, it’s important to document some of the history to authenticate the story behind the piece. It’s important to be able to keep track of the history of the sale process, explains Jansen. This means collecting as much information as you can about previous sales when you are buying art and then holding onto documents, like the bill of sale, so you can show prospective buyers when it comes time to sell, he explains.

Abbott adds that it can also be a good idea to attach that information directly to the backboard of a painting. “We sometimes look at the reverse of paintings and there’s a letter from the 1920s on there, and it’s really amazing,” she says. “Nothing beats physical information being attached; no matter where it moves, the history follows.”

Getting an outside opinion can help, too, and an art curator or an auction house is often willing to help you assess the value of a piece.

Taxing art

If you’re investing in art, you’re hoping it appreciates in value, but don’t forget to consider the potential tax implications. Any appreciation in value of a piece of art from the time of its purchase or inheritance will eventually be taxed as a capital gain, either on an actual or deemed sale, says Andy Guidi, Director of Tax Planning at BMO Private Wealth.

Although any capital gains you enjoy on art are subject to tax, you may not be able to claim a capital loss if the art falls in value. In Canada, art will usually be considered as Listed Personal Property (LPP) under the Income Tax Act, which is a subset of Personal Use Property. While losses on Personal Use Property cannot be claimed, if you incur a capital loss on a particular item that is considered Listed Personal Property, it can be applied against the capital gain realized on other LPP, explains Guidi.

Tax rules deem a sale at Fair Market Value (FMV) to have occurred upon death, so prepare for any implications on your estate. That means setting money aside to cover any tax or buying life insurance to cover the tax bill, says Guidi. The use of life insurance to cover a tax liability on death is particularly important if the value of the estate is tied up in illiquid assets, like a business and real estate. As well, life insurance can equalize what each heir gets – with the beneficiary who wants to keep the artwork paying the other half of the value from the life insurance proceeds.

Gifting artwork to someone in your family is another instance where the tax rules would deem the piece as being sold at FMV. For instance, if a parent wants to gift a work of art from the family’s personal collection to a child, the parent would have to report the disposition at the FMV on the date of the gift. This transfer could result in a taxable capital gain if the piece of art has appreciated in value.   

Finding your footing in the art scene

While financial professionals can help you invest in stocks and bonds, most don’t have a way to find and purchase art for their clients. BMO Family Office, however, does have an extensive external partner program that can connect clients with artists and curators. Jansen recalls meeting with a couple who perked up when they heard we could help them meet a particular artist. “We leveraged our external partner program, and we were able to get the client in touch with the artist to have a lunch in New York,” he says.

Going to auctions to experience how they work is another great way to learn, suggests Abbott. And while it may not have the same effect as going in person, many auctions have moved online, too. Auctions may seem intimidating, but you don’t need to register to attend an auction and there is never any pressure to bid, she says. “You can just see the room,” she explains. “That’s a really great way to learn about it.”

 

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