Trading stock, or a wristwatch, for art

Investors interested in shifting some of their holdings into fine art need not be put off by a lack of liquid assets.

Works of art worth owning can be quite expensive, but even among professional collectors, it's not that common to draft, say, a $200,000 check.

Often, collectors must sell stock or other assets, or wait for an inheritance or a certificate of deposit to come due.

That can bog down a sale, and so dealers sometimes take a tangible asset in whole or partial exchange for a desired work of art.

"I've traded for houses a couple of times, maybe three times," says Gerald Peters, a Santa Fe, N.M., art dealer. "I've taken stock in trade a few times, too."

Paul Gray, director of the Richard Gray Gallery in Chicago, has accepted a watch as partial payment for a painting. A new Toyota was once given to him as part of a deal on a contemporary painting. "My sister needed the car," he says.

Other objects offered to art dealers include gold coins and jewelry. "Everything is OK as long as both parties agree," says Gilbert Edelson, administrative vice president of the Art Dealers Association of America.

Perhaps the most common trade involves another piece of art. Artwork-for-artwork swaps are also given different tax treatment than a swap involving artwork for some other asset.

The Internal Revenue Service permits tax-free "like-kind" exchanges - for instance, a painting for another painting - but only when the objects involved were acquired for investment purposes rather than as a hobby.

Art sales that involve other objects, such as a house or jewelry, are not tax-free.

Amateurs should be extremely careful in any art deal. Even collectors fall into the trap of thinking they can "trade something they don't think is as valuable as what they're getting, although it usually is," says Mr. Gray. "I'm not in this business to lose money."

While speeding up the sale of artwork, noncash exchanges may add several layers of complication for both buyer and seller. For example, a seller who trades artwork for a house may owe a consignor after the swap, and that person is not likely to want anything other than cash.

Or, an object offered in an exchange may need to be appraised, and differing estimates could lead to protracted negotiations that slow down the sale.

Even a generous appraisal, of course, is not money in the bank, "and someone may end up getting the short end of the stick," Mr. Peters says.