# Borrowing Against a Collection Instead of Selling: Buy-Borrow-Die on Illiquid Assets

> Interest on art loans is non-deductible under §163(h), with no carryforward. Break-even is 5 years versus 7.5 for an SBLOC. Maths, §68 from 2026, collateral.

Author: Дана Берзег — адвокат, Family Office (https://wiki.private.law/authors/berzegova)
Last modified: 2026-08-09T09:44:00.000Z
Canonical: https://wiki.private.law/en/art-lending-vs-selling
Topics: investments
Jurisdictions: usa, uk, global
Product tags: investment, lombard-credit, estate-planning
Semantic tags: investment, lombard-credit, estate-planning

---

The logic transfers from a securities portfolio mechanically: selling a painting means realising gain at the collectibles rate, while borrowing against it delivers the same cash with no taxable event and carries the owner through to the step-up under §1014, which wipes out the accumulated gain in the heirs' hands. The market is built for it: art-secured lending was estimated at US$33.9–40.0 billion in 2025, and Sotheby's Financial Services placed US$700 million of asset-backed notes with a senior class rated AAA (sf) by Morningstar DBRS. The structure breaks at a point that never appears in lenders' presentations: in the classic scenario, interest on an art loan is not deductible at all and cannot be carried forward, and the break-even horizon turns out to be one and a half to two times shorter than on an SBLOC secured by securities. What follows is the mechanics of §163, the arithmetic of the break-even point, how security over an illiquid asset actually works, and the narrow conditions under which the structure still makes sense.

> 🔗 **Related**
> [Art as a tax instrument](https://wiki.private.law/en/art-tax-planning) · [Art as an asset: title, provenance and lending](https://wiki.private.law/en/art-title-and-lending) · [Lombard lending and premium financing](https://wiki.private.law/en/lombard-lending) · [US estate tax](https://wiki.private.law/en/us-estate-tax) · [Upstream basis step-up](https://wiki.private.law/en/upstream-basis-step-up)

## The concept

Buy-borrow-die rests on three pillars: hold without realising, borrow against the holding to fund living expenses, die and pass on a basis reset to market value at the date of death. Moving the structure from a portfolio to a collection changes three parameters at once.

**The rate is higher.** Collectibles gain is taxed at a maximum rate of 28% (§1(h)(1)(F) read with §1(h)(4), IRS Topic no. 409), plus the 3.8% NIIT under §1411 — a federal 31.8% against 23.8% on securities. Taken on its own, this parameter strengthens the case for deferral: the more expensive the realisation, the more valuable it is to avoid.

**There is no interest deduction.** On a portfolio, SBLOC interest falls within investment interest under §163(d) and works against investment income. On art, in the classic scenario, the deduction is nil and permanently so. This parameter outweighs the first.

**The collateral valuation is unobservable.** A portfolio has a public quotation and a margin call is a matter of arithmetic. The value of a painting is an appraiser's opinion — one commissioned and, to a significant degree, controlled by the lender.

> 🍓 The same fact is sold as a benefit and operates as evidence. Lenders advertise that the collection stays on the client's wall; that very circumstance was the decisive argument against the collection's investment character in Wrightsman, and it remains so today.

## Why the interest is not deductible

### The security is irrelevant; tracing decides

Treas. Reg. §1.163-8T(a)(3): interest is allocated in the same manner as the debt to which it relates, and the debt is allocated by tracing disbursements to specific expenditures. §1.163-8T(c)(1) removes the intuition in terms: “Debt proceeds and related interest expense are allocated solely by reference to the use of such proceeds, and the allocation is **not affected by the use of an interest in any property to secure the repayment** of such debt or interest.”

As a matter of law, it is immaterial that the loan is secured on a painting. What matters is exclusively what the money was spent on. This is precisely where the strategy breaks, because its whole point is to spend the money on living.

### Money spent on consumption: personal interest, nil with no carryforward

§163(h)(1) denies an individual any deduction for personal interest. §163(h)(2) defines the term negatively, through six exceptions: trade or business, investment interest within the meaning of subsection (d), passive activity, qualified residence, deferred estate tax, and qualified education loan interest. Consumption spending fits none of them; §1.163-8T(b)(5) classifies it as a personal expenditure directly.

The difference from §163(d) is fundamental: personal interest has no carryforward. The deduction is extinguished in the year it accrues and is lost to all future periods.

### Money reinvested: the §163(d) cap and a second trap

§163(d)(1) caps the investment interest deduction at the year's net investment income; §163(d)(2) carries the disallowed balance forward indefinitely; §163(d)(3)(A) brings within it interest on debt “properly allocable to property held for investment”.

§163(d)(5)(A) defines property held for investment by reference to §469(e)(1) — property producing interest, dividends, annuities or royalties. A painting produces none of these. Its only doorway is §469(e)(1)(A)(ii)(II): “gain or loss ... attributable to the disposition of property ... held for investment”, that is, gain on sale. For as long as the work hangs on the wall, investment income from it is nil, the deduction is nil, and everything rolls into the carryforward.

A caveat on uncertainty is required here. No statute, regulation, ruling or judicial decision resolving whether a work of art counts as property held for investment for §163(d) purposes could be located. The definition in IRS publications is drafted broadly and does not name art. The question should be treated as open, and building a plan on the assumption of a favourable answer is premature.

### The §163(d)(4)(B)(iii) election: there is a way out, and it leads back to selling

A taxpayer may elect to include net capital gain in investment income — line 4g of Form 4952. The price is that the amount so included loses its preferential rates, and the form instructions warn of this in terms.

For collectibles that price is trivial. The Tax Adviser (AICPA, Patrick L. Young, CPA, 1 March 2022) works the example: the gap between 31.8% and an ordinary rate of 32% is two tenths of a percentage point, so $3,000 of gain produces $6 of additional tax against $960 of savings on the interest deduction. The election pays.

The trap closes elsewhere. To use the election, the taxpayer must realise collectibles gain — doing precisely the thing the loan was taken out to avoid. The interest deduction is bought by surrendering the deferral.

### From 2026, §68 trims even the deduction you are allowed

OBBBA (Pub. L. 119-21, 4 July 2025) rewrote §68 in full. The operative version has two subsections. §68(a): itemised deductions are reduced by **2/37** of the lesser of the deductions themselves or the excess of taxable income over the threshold at which the 37% bracket begins (for 2026, $640,600 for single filers and $768,700 for married filing jointly, per Rev. Proc. 2025-32). §68(b) applies the limitation last, after every other limitation. The former subsections containing carve-outs, including the exclusion for investment interest, have been struck out entirely. The provision applies to taxable years beginning after 31 December 2025.

2/37 = 5.4%. A dollar of deduction in the top bracket is now worth roughly 35 cents rather than 37.

The §163 deduction itself survives: §67(b)(1) carves “the deduction under section 163 (relating to interest)” out of the miscellaneous itemised deductions category.

### The cost of keeping a collection: nil, permanently

§67(h) — the former §67(g), redesignated by OBBBA — disallows miscellaneous itemised deductions for taxable years beginning after 31 December 2017. OBBBA struck the words “and before January 1, 2026”, making the suspension permanent. Insurance, storage, restoration and appraisals claimed under §212 are permanently non-deductible for an individual.

### Wrightsman: the collector-versus-investor fork

Before §163(d) comes a blunter question — whether the object is held for investment at all. **Wrightsman v. United States, 428 F.2d 1316 (Ct. Cl., 15 July 1970)**: §212 deductions for insurance, conservation and shipping of a collection of eighteenth-century French art were denied because “the evidence does not establish investment as *the* most prominent purpose for plaintiffs' acquiring and holding works of art”. The test in Treas. Reg. §1.212-1(c) requires “primarily” in the sense of “of first importance”. What told against the plaintiffs was the display of the works in their living quarters and the way the collection was woven into daily life.

Bank of America markets its art line as a way of borrowing against a collection “all while keeping your art on your walls”. The marketing promise and the IRS's central piece of evidence here coincide word for word.

## The arithmetic: at what horizon borrowing beats selling

The calculations below are derived from first principles and do not cite an external source. Assumptions: interest is capitalised, estate tax is left out, and transaction costs on sale and the operating costs of the collection are set aside.

**Model A — a single work.** V is value, B is basis, G = V − B, τ is the effective rate, N is the cash required, r is the loan rate and T is the horizon. Break-even: **T* = ln(1 + τG/N) / ln(1+r)**.

A painting bought in 2006 for $2 million, now worth $20 million; $8 million of cash is needed; τ = 31.8%; tax on sale $5.724 million.

| Art loan rate | 6% | 8% | 10% | 12% |
| --- | --- | --- | --- | --- |
| T*, years | 9.3 | 7.0 | 5.7 | 4.8 |

**Model B — a divisible collection**, fully appreciated (B = 0), sold down exactly as much as is needed, with the works appreciating at a% a year: **T* = ln(1/(1−τ)) / ln((1+r)/(1+a))**. At τ = 31.8% and a = 0, the break-even is 7.8 years at a 5% rate, **5.0 years at 8%**, 4.0 years at 10% and 3.4 years at 12%. Sensitivity to the market at r = 8%: collection appreciation of 3% a year stretches the break-even to 8.1 years, while a 3% decline compresses it to 3.6.

**Comparison with a portfolio.** For securities τ = 23.8%, and the interest is deductible: from 2026 a dollar of deduction is worth 37% × (1 − 2/37) = 35% under §68, plus 3.8% through the reduction in NII under §1411, giving an effective cost of debt of 0.612 r.

| Scenario | Rate | Interest | T*, years |
| --- | --- | --- | --- |
| SBLOC against a portfolio | 6% | deductible, eff. 3.67% | 7.5 |
| SBLOC against a portfolio | 7% | deductible, eff. 4.28% | 6.5 |
| Art, bank lender | 8% | NON-deductible | 5.0 |
| Art, non-bank lender | 12% | NON-deductible | 3.4 |

Isolating a single effect: the same asset, the same 8% rate. Deductible interest gives 8.0 years, non-deductible 5.0. **Non-deductibility on its own consumes 38% of the horizon.** Combined with more expensive funding, the gap against a portfolio widens to a factor of 2.2.

The Californian variant shifts the picture most of all: add 13.3% of state tax with a restricted SALT deduction and τ ≈ 45.1%, stretching the break-even to 7.8 years at 8% and 5.3 years at 12%. A high state tax is the strongest of the factors that extend the break-even.

These figures should be read as follows: the strategy pays off only if death occurs within T*. For a 55-year-old with a life expectancy in the order of 26–28 years, an art loan at 8% loses on horizon by a factor of more than five. It acquires economic sense as a liquidity instrument in the final years of life.

## Security: where the painting stays at home

UCC §9-301(1) ties perfection of a non-possessory security interest to the **debtor's location**; §9-301(2) ties a possessory security interest to the location of the goods themselves. A US lender with a UCC-1 on file does not lose perfection because the work has travelled to an exhibition in Basel.

The owner's relocation is the greater danger. UCC §9-316(a) allows **four months** after a change in the debtor's jurisdiction; on expiry, §9-316(b) renders the interest “deemed never to have been perfected” as against a purchaser for value — the loss is retroactive. For a possessory security interest, §9-316(c) requires the interest to be perfected under the law of the new jurisdiction once the goods arrive there.

The jurisdictional map (Constantine Cannon: Pierre Valentin, Agathe Jacquemet, Irene Fraile) splits the market in two. The work can be left with the borrower in the United States (registration under the UCC), in France following the 2006 reform (Code civil, arts. 2333–2350), in Belgium under the law of 11 July 2013 through the pledge register, and in Spain through the Registro de Bienes Muebles. In Switzerland, Italy and Germany the norm remains a pledge with delivery of possession to the lender. In England, for private individuals, the archaic bills of sale regime — “often incompatible with 21st century lending” — effectively closes off the non-possessory route.

Sotheby's Financial Services puts it carefully: clients in many cases retain possession of the works for the life of the loan, but the in-residence option is “only available in certain locations” and is subject to insurance and security requirements; otherwise, approved storage vendors apply.

## The market in 2025–2026

The Deloitte Private & ArtTactic Art & Finance Report 2025 puts art-secured lending at **US$33.9–40.0 billion** for 2025, forecasting US$42.0–50.1 billion by 2027 with growth running from 10% in 2025 to 11.7% in 2027. Lender revenue is put at US$2.30 billion. UHNWI wealth held in art and collectibles stands at US$2.564 trillion (2024) against US$2.174 trillion (2022). The service is offered by 65% of wealth managers, 68% of private banks and 60% of family offices.

On LTV, Sheppard Mullin (28 July 2025) cites 40–60% of appraised value. Sotheby's Financial Services lends from US$1 million to over US$250 million, against current funding capacity of around US$2 billion and more than US$12 billion advanced over the division's history.

No authoritative source publishes rates: industry surveys go no further than noting that rates at both private banks and asset-backed lenders remain high. The numerical ranges circulating online come from marketing platforms with a direct interest in the subject and should be left out of any calculation.

The claim that the art market is falling does not hold for 2026. The decline belonged to 2024: −12%, to US$57.5 billion on the report's ninth edition. On the tenth edition of the Art Basel & UBS Global Art Market Report, 2025 delivered **+4% to US$59.6 billion**, with auctions up 9% to US$20.7 billion and sales of works above US$10 million up **30% by value**. The United States accounted for 44% of global sales, US$26.0 billion. The upper segment, which is where the collateral pool sits, is more resilient than the middle.

## Popular, and it ends badly

| Practice | The appeal | How it ends |
| --- | --- | --- |
| Borrow against the collection and live on the money until the step-up | The 31.8% is never paid and the work stays on the wall | The interest is characterised as personal interest under §163(h): nil deduction, no carryforward. Break-even at 8% is 5 years; a 55-year-old has 26–28 ahead |
| “I will deduct it as investment interest” | §163(d) exists and the carryforward is indefinite | §1.163-8T(c)(1) ignores the security and looks at the spending. If the money went on living costs, §163(d) does not apply at all. On reinvestment, the art still produces no investment income until it is sold |
| Non-recourse borrowing against a work in a falling market | No personal liability; the worst outcome is handing over the painting | Commissioner v. Tufts, 461 U.S. 300 (1983): amount realised equals the full amount of the debt, and “the fair market value of the property is irrelevant”. A $6 million work, $10 million of debt, basis exhausted — $10 million of collectibles gain, roughly $3 million of tax payable in cash, and the painting is gone |
| Pledge the work, then move to another state or country | The covenant on storage location looks like a formality | UCC §9-316(a): four months after the debtor's jurisdiction changes. Missing the deadline voids perfection retroactively under §9-316(b) as against a purchaser for value. The owner's move is more dangerous than the painting's |
| Borrow against a collection in England, Switzerland, Italy or Germany on “American” terms | “Art lending works the same way everywhere” | There the norm remains a pledge with physical delivery of the object to the lender, and the English bills of sale regime is effectively unworkable for private individuals. The “work stays on the wall” condition does not travel |
| Pledge an entire creative estate | The largest possible facility | Annie Leibovitz, autumn 2008: $24 million against several houses plus the copyright, negatives and rights to every photograph taken and yet to be taken. By 31 July 2009 Art Capital Group was in court seeking access to her homes in order to sell them |
| Trust the appraisal the LTV is calculated from | The opinion is signed by a professional | IRS Art Advisory Panel, FY2023: of 195 items with a claimed value of $795,527,954, 92 were adjusted — 47%. Perelman claimed $410 million from insurers for five canvases; the insurers valued the same works at roughly $100 million, and on 26 September 2025 a New York court dismissed the claim |

## Q&A

### **So the structure does not work at all?**

It works within a narrow corridor. Break-even at 8% with non-deductible interest is five years; anything longer loses to selling. Two circumstances widen the corridor: a high state tax (in California τ ≈ 45.1% stretches the break-even to 7.8 years) and a short remaining horizon. An art loan is sensible as a liquidity instrument for someone in the final years of life, or as a temporary bridge while a sale is being prepared. As a twenty-year tax strategy it is arithmetically loss-making.

### **The loan is secured on a painting but the money is invested in shares. Is there a deduction then?**

The characterisation then shifts to investment interest under §163(d), and the deduction is capped at net investment income from the whole investment portfolio, with an indefinite carryforward of the balance. The security plays no part either way — §1.163-8T(c)(1) excludes it from the analysis. The deduction is created by dividends and interest on the securities purchased; the collection contributes nothing.

### **Do gold and coins also go at 28%?**

Yes. §1(h)(5)(A) refers to §408(m) “without regard to paragraph (3)”, and the §408(m)(3) exception for the American Gold Eagle and similar bullion coins operates only for IRA purposes. For the §1(h) rate, bullion and coins are collectibles in full. The Schedule D instructions list the categories expressly: works of art, rugs, antiques, metals including gold, silver and platinum bullion, gems, stamps, coins and alcoholic beverages.

### **Is a British painting better placed?**

On the rate, yes; on the deduction, worse. The United Kingdom has no special collectibles rate: a painting is taxed at the same 18/24% CGT as shares, with an annual exempt amount of £3,000. The Autumn Budget of 26 November 2025 left the headline CGT rates unchanged. There is, however, no interest deduction at all: the list of qualifying loans in ITA 2007 s.383(2) is closed — plant and machinery for a partnership or employment, shares in a close company and an employee-controlled company, investment in a partnership or a co-operative, and payment of inheritance tax. Acquiring or retaining works of art appears nowhere on the list, and the list does not admit of expansive construction. In the United States the interest at least theoretically falls within §163(d) with an indefinite carryforward; the British version offers neither deduction nor carryforward.

### **Do the chattels exemption and wasting assets help in the UK?**

Not at collection level. TCGA 1992 s.262 exempts a chattel where the proceeds do not exceed £6,000; marginal relief caps the chargeable gain at 5/3 of the excess over £6,000 and ceases to operate once proceeds reach £15,000. The threshold has not been indexed for decades. The wasting-asset route won in **HMRC v. The Executors of Lord Howard of Henderskelfe [2014] EWCA Civ 278** (the Reynolds portrait of Omai held to be plant and therefore exempt under s.45(1)) was closed by amendment: from 6 April 2015 (1 April 2015 for companies) s.45(3B) reaches assets used in another person's business, while s.45(3A) removes the apportionment of gain under s.45(3), so the whole gain becomes chargeable. HMRC in CG76722 names antique, fine art or jewellery expressly as examples.

### **Does estate tax change the arithmetic?**

Probably in favour of borrowing, and it is a separate calculation. For estates above $15 million (the basic exclusion amount for 2026 per Rev. Proc. 2025-32), debt is deductible from the taxable estate under §2053, but the provision requires the obligation to be bona fide and the accrued interest to be actually and necessarily incurred; this is the contested territory of Graegin loans. That part has not been verified here against primary sources and calls for separate checking before any decision is taken.

### **What happens to the step-up itself — will it not be repealed?**

§1014 is in force, and OBBBA left it untouched, making the increased exclusion permanent instead. Legislative proposals to replace the step-up with carryover basis, or to tax gain at death, were tabled in 2021–2024 but were never enacted. History rather favours the provision's durability: the carryover basis introduced by the Tax Reform Act of 1976 never took effect and was repealed retroactively in 1980, while the version that applied in 2010 under EGTRRA 2001 was wound back with an election — about 60% of estates chose carryover that year. The fiscal stake is nonetheless large and keeps the topic alive: estimates of replacing the step-up with carryover range from $110 billion over a decade (CBO) to $322 billion for the Biden proposal (Treasury).

> 🍓 Borrowing against a collection instead of selling sounds like porting a proven scheme, but three parameters break the transfer. The security is irrelevant to the deduction: §1.163-8T(c)(1) looks only at how the funds were spent, and money spent on living turns the interest into personal interest under §163(h) — nil deduction, no carryforward. Reinvestment moves it into §163(d), where the painting still produces no investment income until sold, and the line 4g election on Form 4952 pays for collectibles but requires realising precisely the gain the loan was meant to defer. From 2026, §68 trims even the permitted deduction by 2/37, and §67(h) has made insurance, storage and appraisals permanently non-deductible. On the arithmetic: at 8% and a fully appreciated collection, break-even is five years against 7.5 years for an SBLOC on a portfolio at 6%; non-deductibility alone consumes 38% of the horizon. What rescues the structure is a high state tax (in California the break-even stretches to 7.8 years) and a short remaining life. On top sit the illiquidity risks: perfection dies four months after the debtor moves under UCC §9-316(a), a non-recourse default under Tufts produces tax on the full debt with the work already gone, and 47% of the appraisals that reached the IRS Art Advisory Panel in FY2023 did not survive.

## Sources

- [IRS — Topic no. 409, Capital Gains and Losses](https://www.irs.gov/taxtopics/tc409) — the 28% maximum rate on collectibles; page last updated 25 February 2026
- [26 U.S. Code §1](https://www.law.cornell.edu/uscode/text/26/1) — §1(h)(1)(F) applies 28% to 28-percent rate gain, §1(h)(4) defines the term, §1(h)(5)(A) refers to §408(m) “without regard to paragraph (3)”
- [26 U.S. Code §1411](https://www.law.cornell.edu/uscode/text/26/1411) — the 3.8% NIIT; $250,000 / $200,000 thresholds, unindexed since 2013
- [IRS — Instructions for Schedule D](https://www.irs.gov/instructions/i1040sd) — the list of collectibles including bullion; 28% Rate Gain Worksheet
- [26 U.S. Code §408](https://uscode.house.gov/view.xhtml?req=(title%3A26%20section%3A408%20edition%3Aprelim)) — the six categories of collectible in §408(m)(2)
- [26 CFR §1.163-8T](https://www.law.cornell.edu/cfr/text/26/1.163-8T) — tracing of disbursements and the express exclusion of security from the analysis in §1.163-8T(c)(1)
- [26 U.S. Code §163](https://www.law.cornell.edu/uscode/text/26/163) — the personal interest disallowance in §163(h), the cap and carryforward in §163(d), the election in §163(d)(4)(B)(iii)
- [26 U.S. Code §469](https://www.law.cornell.edu/uscode/text/26/469) — §469(e)(1)(A): the categories of investment income and the route through gain on disposition
- [Form 4952, Investment Interest Expense Deduction](https://www.irs.gov/pub/irs-pdf/f4952.pdf) — line 4g and the warning about losing preferential rates
- [The Tax Adviser — Maximizing the investment interest deduction](https://www.thetaxadviser.com/issues/2022/mar/maximizing-investment-interest-deduction/) — the AICPA calculation showing the election pays for collectibles: $6 against $960
- [26 U.S. Code §68](https://www.law.cornell.edu/uscode/text/26/68) — the post-OBBBA text: itemised deductions trimmed by 2/37, applying to years beginning after 31 December 2025
- [Gunster — The new 2/37 rule](https://www.gunster.com/newsroom/publications/the-new-2-37-rule-and-how-it-will-affect-your-taxes) — the effect quantified: 35 cents instead of 37
- [26 U.S. Code §67](https://www.law.cornell.edu/uscode/text/26/67) — §67(b)(1) preserves the §163 deduction; §67(h) makes the disallowance of miscellaneous itemised deductions permanent
- [Wrightsman v. United States, 428 F.2d 1316](https://law.justia.com/cases/federal/appellate-courts/F2/428/1316/172941/) — §212 deductions on a collection denied; the “primarily” test and the role of display in living quarters
- [26 U.S. Code §1014](https://www.law.cornell.edu/uscode/text/26/1014) — basis stepped up to market value at the date of death; consistent basis reporting under §1014(f)
- [IRS — Tax inflation adjustments for tax year 2026](https://www.irs.gov/newsroom/irs-releases-tax-inflation-adjustments-for-tax-year-2026-including-amendments-from-the-one-big-beautiful-bill) — 37% bracket thresholds of $640,600 / $768,700 and the $15,000,000 estate tax exclusion
- [Tax Foundation — Biden estate tax and unrealized capital gains at death](https://taxfoundation.org/blog/biden-estate-tax-unrealized-capital-gains-at-death/) — the failure of carryover basis in 1976 and 2010; 60% of estates elected carryover
- [CRFB — Closing the stepped-up basis loophole](https://www.crfb.org/blogs/closing-stepped-basis-loophole) — budgetary estimates for the step-up from CBO, JCT, Penn Wharton and Treasury
- [UCC §9-301](https://www.law.cornell.edu/ucc/9/9-301) — non-possessory security tied to the debtor's location, possessory security to the location of the goods
- [UCC §9-316](https://www.law.cornell.edu/ucc/9/9-316) — the four-month window on a change of the debtor's jurisdiction and the retroactive loss of perfection
- [Constantine Cannon — Art Finance: leaving the art on the borrower's walls](https://www.artatlaw.com/art-finance-leaving-the-art-on-the-borrowers-walls/) — the jurisdictional map: where non-possessory security is available and where a possessory pledge remains the norm
- [Deloitte Private & ArtTactic — Art & Finance Report 2025](https://www.deloitte.com/content/dam/assets-zone2/at/de/docs/presse/2025/deloitte-art-finance-report-2025.pdf) — the size of art-secured lending, the forecast to 2027 and service penetration
- [Sotheby's — Art-backed lending 101](https://www.sothebys.com/en/articles/art-backed-lending-101-unlocking-the-value-of-your-fine-art-collection) — loan range, client retention of possession and the caveats on location and insurance
- [PR Newswire — Sotheby's Financial Services $700 million securitization](https://www.prnewswire.com/news-releases/sothebys-financial-services-announces-groundbreaking-700-million-securitization-302120163.html) — four classes of notes, AAA (sf) from Morningstar DBRS, 17 April 2024
- [Sheppard Mullin — Art as collateral: the legal landscape of art-backed lending](https://www.sheppard.com/insights/blogs/art-as-collateral-the-legal-landscape-of-art-backed-lending) — LTV of 40–60% of appraised value, 28 July 2025
- [Bank of America Private Bank — Art Services](https://www.privatebank.bankofamerica.com/solutions/art-services.html) — “all while keeping your art on your walls”
- [Art Basel & UBS Global Art Market Report 2026](https://www.artbasel.com/stories/the-art-basel-and-ubs-global-art-market-report-2026?lang=en) — US$59.6 billion and +4% for 2025, auctions +9% to US$20.7 billion, +30% by value above US$10 million
- [Commissioner v. Tufts, 461 U.S. 300 (1983)](https://supreme.justia.com/cases/federal/us/461/300/) — amount realised on non-recourse debt equals the full amount of the obligation
- [IRS Publication 5392 — Art Appraisal Services Annual Report](https://www.irs.gov/pub/irs-pdf/p5392.pdf) — FY2023: 195 items, 92 adjustments (47%), $50,000 referral threshold
- [The Art Newspaper — Perelman insurance lawsuit rejected](https://www.theartnewspaper.com/2025/09/26/ron-perelman-insurance-lawsuit-rejected-ny-court) — the $410 million versus $100 million valuation gap on five canvases; decision of 26 September 2025
- [Art Observed — Art Capital sues Annie Leibovitz](http://artobserved.com/2009/08/art-capital-sues-annie-leibovitz-to-collect-on-24-million-loan/) — a $24 million loan against houses, copyright and the negatives of every photograph
- [GOV.UK — Capital Gains Tax rates](https://www.gov.uk/capital-gains-tax/rates) — the UK's 18/24% with no special collectibles rate; annual exempt amount £3,000
- [TCGA 1992, section 262](https://www.legislation.gov.uk/ukpga/1992/12/section/262) — the £6,000 chattels exemption and 5/3 marginal relief
- [HMRC CG76722](https://www.gov.uk/hmrc-internal-manuals/capital-gains-manual/cg76722) — s.45(3A)/(3B) from 6 April 2015; antique, fine art or jewellery given as examples
- [HMRC v. The Executors of Lord Howard of Henderskelfe [2014] EWCA Civ 278]([https://www.bailii.org/ew/cases/EWCA/Civ/2014/278.html](https://www.bailii.org/ew/cases/EWCA/Civ/2014/278.html)) — the portrait of Omai as plant and a wasting asset
- [ITA 2007, section 383](https://www.legislation.gov.uk/ukpga/2007/3/section/383) — the closed list of qualifying loans, which does not include art
*Last reviewed: August 2026*

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## FAQ

### So the structure does not work at all?

It works within a narrow corridor. Break-even at 8% with non-deductible interest is five years; anything longer loses to selling. Two circumstances widen the corridor: a high state tax (in California τ ≈ 45.1% stretches the break-even to 7.8 years) and a short remaining horizon. An art loan is sensible as a liquidity instrument for someone in the final years of life, or as a temporary bridge while a sale is being prepared. As a twenty-year tax strategy it is arithmetically loss-making.

### The loan is secured on a painting but the money is invested in shares. Is there a deduction then?

The characterisation then shifts to investment interest under §163(d), and the deduction is capped at net investment income from the whole investment portfolio, with an indefinite carryforward of the balance. The security plays no part either way — §1.163-8T(c)(1) excludes it from the analysis. The deduction is created by dividends and interest on the securities purchased; the collection contributes nothing.

### Do gold and coins also go at 28%?

Yes. §1(h)(5)(A) refers to §408(m) “without regard to paragraph (3)”, and the §408(m)(3) exception for the American Gold Eagle and similar bullion coins operates only for IRA purposes. For the §1(h) rate, bullion and coins are collectibles in full. The Schedule D instructions list the categories expressly: works of art, rugs, antiques, metals including gold, silver and platinum bullion, gems, stamps, coins and alcoholic beverages.

### Is a British painting better placed?

On the rate, yes; on the deduction, worse. The United Kingdom has no special collectibles rate: a painting is taxed at the same 18/24% CGT as shares, with an annual exempt amount of £3,000. The Autumn Budget of 26 November 2025 left the headline CGT rates unchanged. There is, however, no interest deduction at all: the list of qualifying loans in ITA 2007 s.383(2) is closed — plant and machinery for a partnership or employment, shares in a close company and an employee-controlled company, investment in a partnership or a co-operative, and payment of inheritance tax. Acquiring or retaining works of art appears nowhere on the list, and the list does not admit of expansive construction. In the United States the interest at least theoretically falls within §163(d) with an indefinite carryforward; the British version offers neither deduction nor carryforward.

### Do the chattels exemption and wasting assets help in the UK?

Not at collection level. TCGA 1992 s.262 exempts a chattel where the proceeds do not exceed £6,000; marginal relief caps the chargeable gain at 5/3 of the excess over £6,000 and ceases to operate once proceeds reach £15,000. The threshold has not been indexed for decades. The wasting-asset route won in HMRC v. The Executors of Lord Howard of Henderskelfe [2014] EWCA Civ 278 (the Reynolds portrait of Omai held to be plant and therefore exempt under s.45(1)) was closed by amendment: from 6 April 2015 (1 April 2015 for companies) s.45(3B) reaches assets used in another person's business, while s.45(3A) removes the apportionment of gain under s.45(3), so the whole gain becomes chargeable. HMRC in CG76722 names antique, fine art or jewellery expressly as examples.

### Does estate tax change the arithmetic?

Probably in favour of borrowing, and it is a separate calculation. For estates above $15 million (the basic exclusion amount for 2026 per Rev. Proc. 2025-32), debt is deductible from the taxable estate under §2053, but the provision requires the obligation to be bona fide and the accrued interest to be actually and necessarily incurred; this is the contested territory of Graegin loans. That part has not been verified here against primary sources and calls for separate checking before any decision is taken.

### What happens to the step-up itself — will it not be repealed?

§1014 is in force, and OBBBA left it untouched, making the increased exclusion permanent instead. Legislative proposals to replace the step-up with carryover basis, or to tax gain at death, were tabled in 2021–2024 but were never enacted. History rather favours the provision's durability: the carryover basis introduced by the Tax Reform Act of 1976 never took effect and was repealed retroactively in 1980, while the version that applied in 2010 under EGTRRA 2001 was wound back with an election — about 60% of estates chose carryover that year. The fiscal stake is nonetheless large and keeps the topic alive: estimates of replacing the step-up with carryover range from $110 billion over a decade (CBO) to $322 billion for the Biden proposal (Treasury).
Borrowing against a collection instead of selling sounds like porting a proven scheme, but three parameters break the transfer. The security is irrelevant to the deduction: §1.163-8T(c)(1) looks only at how the funds were spent, and money spent on living turns the interest into personal interest under §163(h) — nil deduction, no carryforward. Reinvestment moves it into §163(d), where the painting still produces no investment income until sold, and the line 4g election on Form 4952 pays for collectibles but requires realising precisely the gain the loan was meant to defer. From 2026, §68 trims even the permitted deduction by 2/37, and §67(h) has made insurance, storage and appraisals permanently non-deductible. On the arithmetic: at 8% and a fully appreciated collection, break-even is five years against 7.5 years for an SBLOC on a portfolio at 6%; non-deductibility alone consumes 38% of the horizon. What rescues the structure is a high state tax (in California the break-even stretches to 7.8 years) and a short remaining life. On top sit the illiquidity risks: perfection dies four months after the debtor moves under UCC §9-316(a), a non-recourse default under Tufts produces tax on the full debt with the work already gone, and 47% of the appraisals that reached the IRS Art Advisory Panel in FY2023 did not survive.

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## Factual claims

- As a matter of law, it is immaterial that the loan is secured on a painting.
- §163(h)(1) denies an individual any deduction for personal interest.
- The difference from §163(d) is fundamental: personal interest has no carryforward.
- §163(d)(5)(A) defines property held for investment by reference to §469(e)(1) — property producing interest, dividends, annuities or royalties.
- A taxpayer may elect to include net capital gain in investment income — line 4g of Form 4952.
- 2/37 = 5.4%.
- The §163 deduction itself survives: §67(b)(1) carves “the deduction under section 163 (relating to interest)” out of the miscellaneous itemised deductions category.
- §67(h) — the former §67(g), redesignated by OBBBA — disallows miscellaneous itemised deductions for taxable years beginning after 31 December 2017.