14.6 What Kind of Property Are You Donating?
Generally, a deduction for the fair market value of donated property may be claimed, but the tax law does not treat all donations of appreciated property in the same way. Whether the full amount of the fair market value of the property is deductible depends on the type of property donated, your holding period, the nature of the philanthropy, and the use to which the property is put by the philanthropy. For donations of motor vehicles, boats, or airplanes valued at over $500, special deduction restrictions and substantiation restrictions apply (14.7).
Save records to support the market value and cost of donated property. Get a receipt or letter from the charitable organization acknowledging and describing the gift. You must get a receipt for donations of property valued at $250 or more (14.14). Lack of substantiation may disqualify an otherwise valid deduction.
If the total claimed value for all of your property donations exceeds $500, you must report the donations on Form 8283 (14.15), which you attach to Schedule A, Form 1040. If the claimed value of a donated item (or group of similar items) exceeds $5,000, you generally must base the valuation on a written appraisal from a qualified appraiser; see 14.15 for details on the appraisal requirements.
Figuring value.
When donating securities listed on a public exchange, fair market value is readily ascertainable from newspaper listings of stock prices. It is the average of the high and low sales price on the date of the donation.
To value other property, such as real estate or works of art, you will need the services of an experienced appraiser. Fees paid to an appraiser are not deductible as a charitable contribution, but rather as a miscellaneous itemized deduction (19.1) subject to the 2% adjusted gross income floor on Schedule A.
Caution
Fair market value deductible for appreciated intangible personal property (such as securities) and real estate held long term.
Fair market value is deductible where you have held such property long term (longer than one year) and you give it to a publicly supported charity or to a private foundation that qualifies as a 50% limit organization, but you may not deduct more than 30% of adjusted gross income (14.17). A five-year carryover for the excess is allowed (14.18). If the donation exceeds the 30% ceiling, you may consider a special election that allows you to apply the 50% ceiling (14.19).
A contribution of appreciated securities or real estate held long term has two tax advantages that reduce the real cost of making the contribution:
The IRS ruled that you may not claim a deduction on donated stock if you retain the voting rights, even though the charity has the right to receive dividends and sell the stock. The right to vote is considered a substantial interest and is crucial in protecting a stockholder’s investment.
If you are planning a year-end donation of securities, keep in mind that the gift is generally not considered complete until the properly endorsed securities are mailed or delivered to the charity or its agent (14.1).
Deduction limited to cost for appreciated property not held long term and ordinary income property.
This is property that, if sold by you at its fair market value, would not result in long-term capital gain. The deduction for donations of this kind is restricted to your cost for the property. Examples include: stock and other capital assets held by you for one year or less, inventory items donated by business, farm crops, Section 306 stock (preferred stock received as a tax-free stock dividend, usually in a closely held corporation), and works of art (14.9), books, letters, and memoranda donated by the person who prepared or created them. For example, a former Congressman claimed a charitable deduction for the donation of his papers. His deduction was disallowed. His papers were ordinary income property, and since his cost basis in the papers was zero, he could claim no deduction. Depreciable business property is considered ordinary income property to the extent that depreciation would be recaptured as ordinary income on a sale (44.1–44.3). If the cost of the property was fully deducted under first-year expensing (42.3), you have no cost basis and you may not claim a deduction.
Caution
Use of property by charity determines whether fair market value or cost is deductible for appreciated tangible personal property held long term.
If you donate appreciated tangible personal property held long term, such as works of art (14.9), jewelry, furniture, books, equipment, fixtures (severed from realty), and antique cars, the deduction limit depends on how the charitable organization uses the property. If the property is used by the organization for purposes related to its tax-exempt purpose or function, you may deduct the fair market value.
If the organization puts the property to a use that is unrelated to its tax-exempt purpose or function, the deduction is limited to your cost basis because the fair market value must be reduced by the amount of long-term capital gain that would have been realized if the property had been sold at fair market value. If the charity sells your gift to obtain cash for its exempt purposes, your donation is treated as being put to a nonrelated use by the charity, and your deduction must be reduced by the long-term gain element unless on the date of the donation you could reasonably anticipate that the property would not be sold (or put to another nonrelated use). A certification of exempt use from the charity is required if you claim a deduction exceeding $5,000 and the charity sells the property within three years; see below.
If the donation of tangible personal property is to a 50% deduction limit organization such as a church or college, and you must reduce the deduction as a nonrelated gift, the reduced gift is then subject to the 50% annual deduction ceiling discussed in 14.17. If the organization’s use of the property is related to its tax-exempt charitable purposes, and it is a 50% limit organization, you may deduct the property’s fair market value subject to the 30% of adjusted gross income deduction ceiling (14.17). Alternatively, you may elect to deduct up to 50% of adjusted gross income by reducing the deduction by the long-term gain (14.19).
Law Alert
Deductions of appreciated tangible personal property exceeding $5,000 may be reduced or recaptured on sale by charity within three years.
Special certification rules apply to donations of appreciated tangible personal property for which you claim a deduction of more than $5,000:
Donating mortgaged property.
A donation of mortgaged property may be taxable. Before you give mortgaged property to a charity, have an attorney review the transaction. You may deduct the excess of fair market value over the amount of the outstanding mortgage. However, you may realize a taxable gain. The IRS and Tax Court treat the transferred mortgage debt as cash received in a part-gift, part-sale subject to the rules for bargain sales of appreciated property (14.8). You will realize a taxable gain if the transferred mortgage exceeds the portion of basis allocated to the sale part of the transaction. This is true even if the charity does not assume the mortgage.
| Amount realized | $100,000 |
| Allocated basis | 60,000 |
| Gain | $ 40,000 |
Donating capital gain property to private non-operating foundations.
You generally may not deduct the full fair market value of gifts of capital gain property to private non-operating foundations that are subject to the 20% deduction ceiling for non–50% limit organizations (14.17). (Capital gain property is property that, if sold by you at fair market value, would result in long-term capital gain.) The deduction must be reduced by the long-term gain that would have been realized if the property had been sold at fair market value. In other words, your deduction is limited to your cost basis.
An exception is available for certain contributions of stock to a private non-operating foundation; see below.
Stock donation to private non-operating foundation.
A deduction for fair market value is allowed on a donation to a non-operating private foundation of appreciated publicly traded stock held long term. To qualify, there must be readily available market quotations on an established securities market for the stock on the date of the contribution. If you or family members donated more than 10% of a corporation’s stock, the fair market value deduction is allowed only for the first 10%. Under the family aggregation rule, your contributions of stock in a particular publicly traded corporation are aggregated with those of your spouse, brothers, sisters, parents and grandparents, children, grandchildren, and great-grandchildren to all private non-operating foundations, whether the foundations are related or not. If the 10% limit is exceeded, the excess contributions are subject to the cost basis deduction limitation.
The IRS has ruled that for purposes of applying the 10% limit, you must take into account previous stock contributions that the private foundation sold before the new contributions were made. Once publicly traded stock is donated to a private foundation, it must be counted toward the 10% limit, even if it is later disposed of. Furthermore, the value of each contribution at the time it is made is the value taken into account for applying the 10% limitation; prior contributions are not revalued each time there is a new contribution.
Patents and other intellectual property.
If you donate patents or other intellectual property to charity, such as trademarks, trade names, trade secrets, know-how, and certain copyrights and software, you can claim an initial charitable contribution deduction for your cost basis in the property (assuming that is less than its fair market value). Additional deductions may be claimed in the year of the donation and in later years, based on a percentage of the income that the charity realizes from the property.
The additional deductions are allowed on a sliding scale percentage basis for the 10-year period beginning on the date of the contribution. In order to obtain the additional deductions, you must accompany the donation with a written statement to the charity that includes your name, address, and taxpayer identification number, a description of the intellectual property, and the date of the contribution. The statement must specify that you intend to treat the contribution as a qualified intellectual property contribution and will claim additional deductions for the allowable annual percentage of the charity’s income from the property.
For each year that the charity realizes net income from the property in the 10-year period beginning on the date of the contribution, the charity must report the income to the IRS on Form 8899. A copy of Form 8899 is sent to you and the income shown may be used as the basis for claiming an additional contribution deduction.
For further details, see the instructions to Form 8899 and IRS Publication 526.
U.S. Saving Bonds.
You may not donate U.S. Saving Bonds, such as EE bonds, because you may not transfer them. They are nonnegotiable. You must first cash the bonds and then give the proceeds to the charity, or surrender the bonds and have new ones registered in the donee’s name. When you do this, you have to report the accrued interest on your tax return. Of course, you will get a charitable deduction for the cash gift.
Gift of installment obligations.
You may deduct your donation of installment notes to a qualified philanthropy. However, if you received them on your sale of property that you reported on the installment basis, you may realize gain or loss on the gift of the notes (5.28). The amount of the contribution is the fair market value of the obligation, not the face amount of the notes.