Decades ago, I inherited a valuable piece of art, and I’m now considering selling it to finance a grandchild’s graduate degree that will cost $80,000. What do I need to consider in regard to taxes? Do I sell the piece and pay taxes? Then I could give the money to my grandchild over two years to reduce any gift tax. Or shall I gift the piece to my grandchild and let them sell it? They would pay taxes at their lower rate, correct? Or shall I sell it, pay the tuition directly and possibly avoid the gift tax situation?
The person who left me the art paid nothing for it. It was a gift from the artist, who has become very popular among collectors. The auction estimate I got from a professional appraiser was $35,000-$60,000, but the auction house charges 10%. There are auctions in June and September. Also, there is no cost basis for the art, as it was a gift from the artist to my relative, who left it to me.
As a retiree, I am in the 12% tax bracket.
– Anna
Let’s start by laying a foundation for understanding the situation you’re in with regard to taxation on the artwork and the subsequent gift you’ll be making. Based on what you’ve said here, I think there are a few things we need to clarify before you decide how you’ll proceed. This is certainly a situation where consulting a tax advisor is going to be a good idea. (And if you need help finding a financial advisor with tax expertise, connect with advisors using this free tool.)
How Gifts Are Taxed
You’re right to think about the tax implications of any gift you may make to your grandchild. It seems like you’re aware that you have an annual exclusion amount ($18,000 in 2024), and that gifts over this amount are potentially subject to federal gift taxes.
However, making a gift that exceeds $18,000 in 2024 won’t automatically trigger gift taxes. That’s because the IRS provides a lifetime exemption – for any gift that surpasses your annual exclusion, the excess is simply subtracted from this lifetime limit. The lifetime exemption limit, which is adjusted each year, stands at $13.61 million in 2024.
So, if you gifted your grandchild $50,000 in 2024, the first $18,000 would be completely tax-free and the remaining $32,000 would be subtracted from your lifetime exemption. As a result, your exemption would drop to $13.578 million.
However, there’s a big workaround in your specific situation since there’s no limit to how much tuition you can pay for someone else. If you paid for your grandchild’s degree in its entirety, that money would be specifically exempted from gift tax. To take advantage of this exception you need to pay the institution directly, and be mindful that only tuition expenses qualify. Other associated fees like book costs or room and board don’t. (And if you need additional help navigating gift tax rules, consider working with a financial advisor.)
Taxation on Selling the Artwork
You are also right that you’ll likely incur a tax obligation when you sell the artwork. Collectibles have their own capital gain tax rate of 28%, but if your income tax rate is lower (12% in your case), that’s the rate you would pay when you sell the art.
However, at least conceptually, the artwork has a cost basis that you can use to reduce the taxable capital gain. Since you inherited the asset, the cost basis is the fair market value of the artwork when you inherited it. That’s generally the date on which the person who gifted you the asset died.
Determining what the artwork’s fair market value was decades ago may not be easy, though. There may have been an appraisal done at the time for the decedent’s estate that includes a value for that artwork. However, if no appraisal was done, your tax advisor may suggest consulting an expert about getting a retroactive appraisal. (If you need help planning your estate, connect with an advisor who has estate planning expertise.)
Your Grandchild’s Tax Rate
If you gift the artwork to your grandchild and let them sell it, they may incur less in capital gains taxes than you would if they’re in an even lower tax bracket than you.
However, that money will then be theirs, which could have other effects on their college financial aid. When your grandchild files their FAFSA, their own assets will be weighted more heavily in determining the amount of aid they may receive. Make sure you understand what these second-order effects will be before making your decision. Financial aid counselors at the school may be able to help.
Next Steps
Your best bet may be to sell the asset yourself and pay your grandchild’s tuition directly, although I can’t say for certain. Considering that your situation intertwines the gift tax, capital gains on collectibles, valuation of inherited artwork and student aid issues, I think it’s worthwhile to consult a tax or financial advisor who has specific expertise in these areas. They can work through the details of your situation with you.
Tips for Finding a Financial Advisor
- How much you’re willing to pay for a financial advisor’s services can play an important role in which advisor you end up hiring. Advisors can use a variety of fee structures, including flat fees and hourly rates. However, many advisors charge a fee that’s based on how much money they manage for you. This is known as an asset-based fee or AUM fee (assets under management). One percent is the oft-quoted industry standard, however, the average fee typically ranges from $1.18% to 0.59%, according to AdvisoryHQ.
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Brandon Renfro, CFP®, is a SmartAsset financial planning columnist and answers reader questions on personal finance and tax topics. Got a question you’d like answered? Email AskAnAdvisor@smartasset.com and your question may be answered in a future column.
Please note that Brandon is not a participant in SmartAsset AMP, and he has been compensated for this article. Some reader-submitted questions are edited for clarity or brevity.
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