Charitable Contributions of Property
If you contribute property to a qualified organization, the amount of your charitable contribution deduction is generally the fair market value of the property at the time of the contribution. However, if the property fits into one of the categories discussed below, the amount of your deduction must be decreased. As with many aspects of tax law, the rules are quite complex. This article addresses what you need to know, if you’re considering a charitable contribution of property.
Determining Fair Market Value
Fair market value (FMV) is the price at which property would change hands between a willing buyer and a willing seller, neither having to buy or sell and both having reasonable knowledge of all of the relevant facts.
Donating Property That Has Decreased in Value
If you contribute property with a fair market value that is less than your basis in it (generally, less than what you paid for it), your deduction is limited to its fair market value. You cannot claim a deduction for the difference between the property’s basis and its fair market value. Common examples of property that decreases in value include clothing, furniture, appliances and cars.
Donating Property That Has Increased in Value
If you contribute property with a fair market value that is more than your basis in it, you may have to reduce the fair market value by the amount of appreciation (increase in value) when you figure your deduction. Again, your basis in the property is generally what you paid for it. Different rules apply to figuring your deduction, depending on whether the property is ordinary income property or capital gain property.
Ordinary Income Property
Property is ordinary income property if its sale at fair market value on the date it was contributed would have resulted in ordinary income or in short-term capital gain. Examples of ordinary income property are inventory, works of art created by the donor, manuscripts prepared by the donor and capital assets held one year or less.
Equipment or other property used in a trade or business is considered ordinary income property to the extent of any gain that would have been treated as ordinary income under the tax law, had the property been sold at its fair market value at the time of contribution.
Capital Gain Property
Property is capital gain property if its sale at fair market value on the date of the contribution would have resulted in a long-term capital gain. Capital gain property includes capital assets held more than one year.
Capital assets. Capital assets include most items of property that you own and use for personal purposes or investment. Examples of capital assets are stocks, bonds, jewelry, coin or stamp collections and cars or furniture used for personal purposes. For purposes of figuring your charitable contribution, capital assets also include certain real property and depreciable property used in your trade or business and, generally, held more than one year.
Real property. Real property is land and, generally, anything that is built on, growing on or attached to land.
Depreciable property. Depreciable property is property used in business or held for the production of income and for which a depreciation deduction is allowed.
Ordinary or capital gain income included in gross income. You do not reduce your charitable contribution, if you include the ordinary or capital gain income in your gross income in the same year as the contribution. This may happen when you transfer installment or discount obligations or when you assign income to a charitable organization.
Contributions Subject to Special Rules
Special rules apply if you contribute:
- Clothing or household items,
- A car, boat or airplane,
- Works of art,
- Food inventory,
- Taxidermy property,
- Property subject to a debt,
- A partial interest in property,
- A fractional interest in tangible personal property,
- A qualified conservation contribution,
- A future interest in tangible personal property,
- Inventory from your business, or
- A patent or other intellectual property.
Used Clothing and Household Items
The fair market value of used clothing and used household goods, such as furniture and furnishings, electronics, appliances, linens and other similar items is typically the price that buyers of used items actually pay at retailers such as thrift shops. Be prepared to support your valuation of household items with photographs, canceled checks, receipts from your purchase of the items or other evidence.
Cars, Boats and Aircraft
The FMV of a donated car, boat or airplane is generally the amount listed in a used vehicle pricing guide for a private party sale, not the dealer retail value, of a similar vehicle. The FMV may be less than that, however, if the vehicle has engine trouble, body damage, high mileage or any type of excessive wear.
Except for inexpensive small boats, the valuation of boats should be based on an appraisal by a marine surveyor, because the physical condition is so critical to the value.
If you donate a qualified vehicle to a qualified organization, and you claim a deduction of more than $500, you can deduct the smaller of the gross proceeds from the sale of the vehicle by the organization or the vehicle’s fair market value on the date of the contribution. If the vehicle’s fair market value was more than your cost or other basis, you might have to reduce the fair market value to figure the deductible amount.
Paintings, Antiques and Other Works of Art
Deductions for contributions of paintings, antiques and other works of art should be supported by a written appraisal from a qualified and reputable source unless the deduction is $5,000 or less.
Art valued at $20,000 or more. If you claim a deduction of $20,000 or more for donations of art, you must attach a complete copy of the signed appraisal to your return. For individual objects valued at $20,000 or more, a photograph of a size and quality fully showing the object, preferably an 8 x 10-inch color photograph or a color transparency no smaller than 4 x 5 inches, must be provided upon request.
Art valued at $50,000 or more. If you donate an item of art that has been appraised at $50,000 or more, you can request a Statement of Value for that item from the IRS. You must request the statement before filing the tax return that reports the donation.
Recently enacted special rules apply to certain donations of food inventory to a qualified organization. Please call us, if you would like information about donations of food inventory.
A bargain sale of property to a qualified organization (a sale or exchange for less than the property’s fair market value) is partly a charitable contribution and partly a sale or exchange. The part of the bargain sale that is a sale or exchange may result in a taxable gain.
Seek Advice from a Tax Professional
Stiff penalties may be assessed by the IRS, if you overstate the value or adjusted basis of donated property. Further, your entire deduction can be disallowed, if you do not properly document your donation in accordance with regulations; some taxpayers have lost millions of dollars in tax savings because of overlooked details. If you’re considering a charitable contribution of property, don’t hesitate to call our office to speak with a qualified tax professional.