Often, museums are fortunate enough to acquire a piece of artwork or a full collection at a wonderfully low price. Sometimes equally as wonderful, the artwork or collection may suddenly experience a dramatic rise in value, especially in a volatile market environment. Such a confluence of good luck can be extremely beneficial for a museum. However, such bounty can sometimes turn into a fiscal nightmare should a museum wish to sell an appreciated piece of artwork or entire collection. For example, Museum A purchases a piece of work for $500,000.00 in 2005. In 2009 Museum A wishes to sell the artwork and has a buyer willing to pay $2,500,000.00 for the work. Museum A is staring down the barrel of a maximum capital gain tax rate of 28% (which is dramatically higher than 15% rate for other capital assets) on the $2,000,000.00 gain. That is a large tax nut to swallow. Museum A, however, could take advantage of IRC (Internal Revenue Code) Section 1031 to help defer this gain and provide the museum with increased buying power. Like any other interaction with the tax code, the 1031 exchange does come with some threshold requirements. First, the art work being sold must have been held for productive use in trade or business or held for investment purposes. If this initial threshold requirement can be met, you are off and running. Second, and perhaps more complicated in the art arena, is that the taxable gain derived from the sale proceeds of the qualified sold artwork must be rolled into the purchase of a “like-kind” asset. Here comes the rub: the IRS is still slightly unclear as to what is a “like-kind” exchange when dealing with artwork. The quality of the artwork is not taken into account when making the “like-kind” analysis. Rather, the IRS struggles with whether the purchase of an artwork in a different medium would qualify as a “like-kind” exchange for 1031 purposes. For example, can a Monet be exchanged for a Rodin sculpture? Maybe. Unfortunately, such a decision is rather subjective. Third, there are very stringent timing requirements in a 1031 exchange. For instance, the replacement artwork for the sold work must be unambiguously targeted and designated in writing no later than 45 days after the sale of the relinquished artwork. Additionally, you must take possession and ownership of the replacement artwork no later than 180 days after the date of the transfer of the relinquished artwork. Finally, the replacement piece of artwork needs to be of a value equal to or greater than the relinquished artwork (thus allowing you to use all of the taxable gain for the purchase, and thus maximizing your tax savings). The 1031 exchange is becoming more popular in the art world. However, proper planning and advice must be sought prior to initiating such a tax saving maneuver.