Before 2018, an art investor could swap one painting for another and defer capital gains taxes indefinitely through a Section 1031 like-kind exchange. The Tax Cuts and Jobs Act of 2017 ended that, limiting 1031 exchanges to real property only. A collector who sells an appreciated work today faces a federal rate of up to 28% on long-term gains, plus a potential 3.8% net investment income tax, with no direct way to roll those gains into a new piece tax-free.

That 31.8% combined ceiling matters most to the investors who have done well. If you are sitting on a work that has doubled or tripled over a decade, the tax on selling is now a real drag on what you keep. The code still offers several paths to soften it, from charitable remainder trusts to installment sales to opportunity zone funds. Each comes with trade-offs. We think the most useful one is also the quietest, and we will get to it. None is a clean substitute for what 1031 used to do.

What was a 1031 exchange and how did it work for art?

Section 1031 of the Internal Revenue Code let a taxpayer exchange one investment asset for a "like-kind" asset without triggering a taxable event. For decades, this applied to personal property, including artwork, antiques, jewelry, and other collectibles. Imagine you are a collector holding a Basquiat that has appreciated by $2 million. Under the old rules you could trade it for a comparable work and push the tax bill into the future, sometimes indefinitely.

The rules required both assets to be held for investment or business purposes, not personal use. The exchange had to follow strict timelines: 45 days to identify replacement property, 180 days to close. And "like-kind" for personal property was read more narrowly than for real estate. A painting could be exchanged for another painting, but not for a vintage car. Within those limits, 1031 gave art investors something close to the tax deferral that real estate investors had long enjoyed.

The IRS never published exact figures on how many collectors used 1031 exchanges for art. The practice was common enough that major auction houses and art advisors built workflows around it. Dealers structured consignment agreements to fit within exchange timelines. Qualified intermediaries held sale proceeds in escrow while collectors identified replacement works. So this was not a fringe maneuver. It was part of how the high end of the market operated.

What did the 2017 tax law change for collectibles?

The Tax Cuts and Jobs Act, signed into law in December 2017, restricted Section 1031 to exchanges of real property only. Starting January 1, 2018, artwork, collectibles, equipment, vehicles, patents, and all other personal and intangible property became ineligible. The change applied broadly. Aircraft, livestock, franchise licenses, and fast-food equipment lost 1031 status alongside fine art.

A narrow transition rule preserved exchange treatment for personal property if the taxpayer had disposed of the relinquished asset on or before December 31, 2017, or received replacement property by that date. After that window closed, the door shut for good.

The real estate industry lobbied hard to keep its 1031 benefits, and it succeeded. In July 2025, when President Trump signed the "One Big Beautiful Bill" into law, Section 1031 survived intact for real property. The legislation made no effort to restore exchange eligibility for personal property or collectibles. Industry advocacy focused entirely on protecting real estate exchanges, and the art world had no comparable lobbying effort. We would note that this is consistent with a broader pattern. Art remains a roughly $1.5 trillion asset class with very little institutional machinery built around it, so when the tax code is rewritten, there is rarely anyone in the room arguing the collector's case.

As of April 2026, no pending bill in Congress proposes restoring 1031 exchange treatment for art or other personal property. The change appears permanent.

Why is the art capital gains tax 28% instead of 20%?

The IRS taxes long-term capital gains on collectibles differently from gains on stocks or real estate. Most long-term capital gains face rates of 0%, 15%, or 20% depending on income. Collectibles carry a maximum rate of 28%.

"Collectibles" under IRC Section 408(m) include artwork, rugs, antiques, metals, gems, stamps, coins, alcoholic beverages, and certain other tangible personal property. The 28% ceiling applies to gains on items held longer than one year. Gains on collectibles held for a year or less are taxed as ordinary income, which can reach 37%.

On top of the 28%, high-income taxpayers may owe the 3.8% net investment income tax (NIIT), which kicks in for single filers above $200,000 in adjusted gross income and married couples above $250,000. That brings the effective federal rate on a collectibles sale to 31.8% for many art investors.

Here is the comparison that makes it concrete. An investor selling $5 million of appreciated stock might pay 23.8% in federal taxes (20% plus the 3.8% NIIT). The same investor selling $5 million of appreciated art would pay 31.8%. On a $3 million gain, that gap works out to roughly $240,000 in extra tax. That is the friction the rest of this piece is about. The art appreciated, the code treats it as a collectible, and the exit is more expensive than it would be for almost any other asset.

Which art tax deferral strategies still work after 1031?

With 1031 gone, art investors have turned to other parts of the code. None offers the simplicity of swapping one painting for another. Each has a place depending on the investor's goals, timeline, and appetite for complexity. We will walk them in order, then tell you which one we think does the most work.

Can a charitable remainder trust defer capital gains on art?

A charitable remainder trust (CRT) lets a collector transfer appreciated artwork into an irrevocable trust, which then sells the art and reinvests the proceeds without paying capital gains tax at the time of sale. The trust pays the donor, or other named beneficiaries, income for a set term or for life, and the remaining assets go to a designated charity when the trust ends.

The tax advantages are real. Because the trust itself is tax-exempt, the full sale proceeds stay invested, generating more income than if the collector had sold outright and paid 31.8% to the IRS first. The donor also receives a partial income tax deduction in the year of the transfer, based on the present value of the future charitable gift.

The catch is that a CRT is irrevocable. The collector gives up ownership of the art permanently. And if the IRS suspects a prearranged sale, meaning the collector had already found a buyer before transferring the art to the trust, the tax benefits disappear. The transfer must happen before any binding sale agreement.

CRTs work best for collectors who are ready to part with specific works, want steady income, and have charitable intent. They are a poor fit for someone who simply wants to trade up to a different artist market.

How does an installment sale spread the tax on selling art?

An installment sale spreads a transaction over multiple tax years. Instead of receiving the full purchase price at closing, the seller takes payments over time, recognizing gain only as each payment arrives.

This does not change the 28% rate on collectibles gains. What it does is prevent a single large sale from pushing the seller into higher brackets on other income or triggering phase-outs for various deductions. For a collector selling a work for $10 million, receiving $2 million per year over five years keeps each year's recognized gain more manageable.

Installment sales require a willing buyer who agrees to the payment schedule, which can complicate negotiations. The seller also takes on credit risk. If the buyer defaults, the seller may have already paid taxes on gain they never collected. For high-value transactions where the buyer and seller have an existing relationship, installment structures are straightforward and do not require giving up ownership of the proceeds.

Are opportunity zone funds a way to defer art gains?

Opportunity zones offer a way to defer capital gains from any source, including art sales, by reinvesting the gain into a Qualified Opportunity Fund (QOF) within 180 days. The deferred gain came due on December 31, 2026, or when the QOF investment was sold, whichever came first.

The July 2025 tax law made the opportunity zone program permanent and expanded benefits for investments in rural zones. Investors who hold a QOF investment for at least five years receive a 10% step-up in basis on the original deferred gain (30% for qualified rural opportunity funds). Holding for ten years or more eliminates capital gains tax on any appreciation in the QOF investment itself.

The limits are worth naming. The deferral applies only to the capital gain amount, not the full sale proceeds. The underlying QOF must invest in qualified opportunity zone property, which generally means real estate or operating businesses in designated low-income census tracts. And the investor must be comfortable parking capital in an illiquid, geographically constrained investment for a decade to get the full benefit.

For an art investor who sells a painting and has no plans to buy another, rolling the gain into a QOF can reduce the overall tax burden substantially. But the risk profile of a real estate development in a designated tract has nothing in common with the art market. This shelters the gain and moves the money into something else entirely.

Can art-backed lending avoid the tax entirely?

Art-backed lending sidesteps the tax question by avoiding a sale. A collector borrows against the appraised value of their artwork, typically at 50% loan-to-value ratios, and uses the cash for other purposes. Because a loan is not a taxable event, no capital gains tax is triggered.

The market for art-secured loans has grown steadily. Bank of America's art loan commitments grew 14% year over year in the first half of 2025, and specialist auction-house lenders collectively manage an estimated $3.5 billion to $5 billion in art-backed loans. Interest payments may be tax-deductible when the loan proceeds fund business or investment activities.

This is not a deferral strategy in the traditional sense. The collector still owns the art and still has an unrealized gain. For investors who need liquidity without wanting to sell, or who are waiting for a better market, borrowing against the collection buys time. We would put the point in market terms. The high end of the art market runs on its own clock, and the last several years have been a correction. Now is generally not the best time to be selling paintings into the market, and a loan lets a collector hold rather than sell into weakness. The gain remains unrealized until a sale occurs. If the collector holds the art until death, heirs receive a stepped-up cost basis that erases the embedded gain entirely, which brings us to the strategy we think matters most.

What is the step-up in basis and why does it matter most?

The most powerful tax benefit available to art collectors requires no trusts, no funds, and no paperwork during the collector's lifetime. Under current law, when an owner dies, their heirs receive the art at its fair market value on the date of death. All unrealized capital gains disappear.

Imagine a collector who bought a painting for $500,000 in 2005 and holds it until death, when it is worth $4 million. The work passes to heirs with a $4 million cost basis. If they sell the next day for $4 million, they owe zero capital gains tax. The $3.5 million gain is never taxed.

This is why we keep coming back to holding period. Art is a long-term, illiquid asset, and the people who do best with it tend to think in decades, not quarters. The step-up in basis rewards exactly that behavior. For older collectors, or anyone building a collection meant to pass to the next generation, it is a strong argument against selling appreciated works at the 31.8% combined rate. It also fits a feature of this market we have written about elsewhere. A great deal of art sits in families for decades, sometimes across multiple generations, and in the trade the usual reasons it ever comes loose are death, divorce, and debt. Low turnover is part of what gives the asset its character. The tax code, in this one respect, leans in the same direction.

The July 2025 tax law did not change the step-up in basis rules. Previous proposals to eliminate it, including early Biden administration plans, failed to gain traction in Congress.

The Bottom Line

  • Section 1031 like-kind exchanges for art ended on January 1, 2018, under the Tax Cuts and Jobs Act, and no current legislation proposes restoring them.
  • Long-term capital gains on collectibles face a maximum federal rate of 28%, plus a potential 3.8% net investment income tax, for a combined ceiling of 31.8%.
  • Charitable remainder trusts can defer gains and generate income, but require giving up ownership of the art permanently.
  • Installment sales spread the tax hit across multiple years without changing the rate, and work best for high-value private transactions.
  • Qualified opportunity zone funds, now a permanent program after July 2025 legislation, let art sellers defer gains and potentially eliminate taxes on new appreciation after a 10-year hold, though the underlying investment has nothing to do with art.
  • Art-backed lending avoids a taxable event altogether by borrowing against the collection rather than selling it, and the market for these loans is growing.
  • The step-up in cost basis at death remains intact, which we think makes long-term holding through an estate the single most tax-efficient strategy for appreciated art. That's it.

Sources

  1. Internal Revenue Service. "Like-Kind Exchanges - Real Estate Tax Tips." IRS.gov, 2025. https://www.irs.gov/businesses/small-businesses-self-employed/like-kind-exchanges-real-estate-tax-tips
  2. IPX1031. "1031 Like Kind Exchange Tax Reform Updates - 1031 Exchanges Fully Intact with 7/4/25 Law." IPX1031, July 2025. https://www.ipx1031.com/1031-tax-reform-updates/
  3. Kiplinger. "Capital Gains on Collectibles: How They Are Taxed by the IRS in 2025." Kiplinger, 2025. https://www.kiplinger.com/taxes/how-collectibles-are-taxed
  4. Charles Schwab. "Tax on Collectibles, Art, and Other Valuables." Schwab.com, 2025. https://www.schwab.com/learn/story/how-collectibles-are-taxed
  5. Kiplinger. "You May Still Be Able to Defer Your 2025 Capital Gains." Kiplinger, 2025. https://www.kiplinger.com/taxes/tax-planning/defer-2025-capital-gains-qualified-opportunity-fund-qof
  6. Cherry Bekaert. "Opportunity Zone Extension: 2025 Tax Reform Bill Updates." Cherry Bekaert, 2025. https://www.cbh.com/insights/articles/2025-tax-reform-expands-opportunity-zones/
  7. Forvis Mazars. "Opportunity Zone Changes in the New 2025 Tax Act." Forvis Mazars US, August 2025. https://www.forvismazars.us/forsights/2025/08/opportunity-zone-changes-in-the-new-2025-tax-act
  8. New York Loan. "Art Tax Planning 2025: Avoid Capital Gains with Loans." NewYorkLoan.com, 2025. https://newyorkloan.com/art-tax-planning-how-2025-market-shifts-impact-your-collection/
  9. Dram Finance. "The Financialization of Collectibles: Why Banks Are Racing to Lend Against Art, Watches, and Whiskey." Dram.finance, 2026. https://www.dram.finance/blog/collectibles-financialization-art-backed-lending-banks-2026
  10. Baird Holm LLP. "Impact of the Tax Cuts and Jobs Act on Like Kind Exchanges (IRC 1031)." BairdHolm.com, 2025. https://www.bairdholm.com/blog/impact-of-the-tax-cuts-and-jobs-act-on-like-kind-exchanges-irc-1031/
  11. KahnLitwin. "1031 Exchanges in 2026: What's Changed and What Investors Should Know." KahnLitwin.com, 2026. https://kahnlitwin.com/blogs/tax-blog/1031-exchanges-in-2026-whats-changed-and-what-investors-should-know