Is It Worth Investing in Art and Collectibles?

The worldwide market for art, collectibles and related items is in the $67 billion range, though this varies depending upon the source used and the methodology used to measure it. This includes sales via galleries, auctions and other means.

Art and collectibles can cover a broad spectrum that includes paintings, sculptures, drawings, sports memorabilia, antiques of all sorts, books, vinyl records and many others. Art and collectibles can be a viable alternative asset class for some investors. Beyond the pure investment aspect, investing in these areas can allow investors to combine their interest in art and collectibles with their investing goals, a potential win-win.

Reasons to Invest in Art and Collectibles

Whether you're looking to diversify your investment range or turn a hobby into something a little bit more fruitful, there are many reasons to consider investing in art and collectibles.

• Your enjoyment. This is an investment that offers the opportunity to invest in an area that brings you enjoyment and also offers the opportunity to make money from something you are passionate about. Enjoyment can go together with a knowledge of the segment of this market you consider for investing. Understanding what you are investing in is always critical, it is perhaps even more critical when investing in art and collectibles.
• Diversifying your portfolio. Art and collectibles have a low correlation to traditional asset classes like stocks and bonds. This can help diversify a portfolio that is otherwise filled with more conventional assets like stocks and bonds, including mutual funds and ETFs that invest in these instruments.
• The potential for financial gains. The level of potential gains can vary widely based on the type of collectible or artwork you are buying, as there are many factors that go into assessing the potential for gains on any piece of art.

What to Consider Before Investing

Unlike with publicly traded securities like stocks, ETFs and mutual funds, there is not a liquid secondary market for art and collectibles. This means that pricing is not readily available as with publicly traded investments. In order to sell your pieces of art or collectibles, you will need to find a willing buyer. Investors in art and collectibles who are considering investing a significant amount need to realize that this is different than investing in mutual funds or ETFs in terms of their ability to convert their investment to cash quickly if needed.

Be sure you understand the market for the type of art or collectible that you are considering. Some questions to consider here are: how are these pieces bought and sold? Are there any major players in a very concentrated marketplace? Is there a reputable online marketplace available?

Another key point to remember is that art and collectibles don't generate ongoing cash flow like bonds, some stocks and mutual funds. The only cash flow you will receive comes at the time when you sell the piece.

Tax Implications Surrounding Art and Collectibles

There are different tax treatments if you sell your collectible, gift to heirs or donate your collections to a museum during your lifetime or at death—and proper planning can help you realize related tax efficiencies.

Art and collectibles should be included in your will or other estate planning documents whether your intent is to donate your collection or to pass it on to your heirs. Your will should specify if and where the collection is to be displayed if that is your intent.

Capital gains taxes on the sale of a collectible differ a bit from those on stocks, mutual funds or ETFs. Long-term capital gains taxes on these securities range from 15% to 20% based on your income if the security is held for at least a year and then sold at a gain from the amount paid for it. In the case of art and collectibles is 28%. As with securities, art and collectibles held for less than a year that are then sold for a gain will be taxed as ordinary income.

Other tax considerations can include sales taxes that may be due when purchasing art and collectibles, as well as use taxes. Use taxes are a form of sales tax levied on purchases made in a different state.

Consult with your tax or financial advisor prior to buying or selling a piece of art or a collectible item.

Finding a Reputable Dealer

Art and collectibles are often purchased through or with the help of a dealer. It’s important if you're considering these types of investments to find a dealer you trust.  You should also be sure to have a clear picture of all the fees and expenses associated with the dealer you're considering. As with anything else, it's always a good idea to understand all fees and transaction costs before moving forward, as this can help avoid unpleasant surprises down the road.

Avoiding counterfeits is important. Sadly this is a reality in the world of art and collectible investing. While this may or may not be a huge issue with less expensive collectibles and art objects if you start dealing in more expensive items you'll want to be sure that you're buying the pieces that you're expecting. This is where selecting a reputable dealer or consultant can be critical. You may also want to establish a relationship with a reputable appraiser in some cases.

Final Considerations

As is the case with any sort of investment, it’s important to have realistic expectations regarding the art or collectibles you are considering. Sometimes you'll hear about paintings or other types of artwork selling for amazingly high prices, sometimes millions of dollars. It’s important to remember that these transactions are the exception rather than the rule. Most sales of art and collectibles command far less money. Know the market for the type of art or collectible you are considering.

Understanding the economics of the art or collectible that interests you can lead to a more profitable experience as an investor. If this happens to be something that you have a passion for as a collector, making some money from this interest can be a great dividend.

The views expressed by the authors are not necessarily those of Fifth Third Bank, National Association and are solely the opinions of the authors. This article is for informational purposes only. It does not constitute the rendering of legal, accounting, or other professional services by Fifth Third Bank, National Association or any of their subsidiaries or affiliates, and are provided without any warranty whatsoever. Deposit and credit products provided by Fifth Third Bank, National Association. Member FDIC.