by Sandra Brown Sherman and Tracy McSweeney
Given the current turbulence in the market, many otherwise charitably inclined individuals may be reluctant to make sizable gifts from their available cash. Yet those same individuals may have other valuable assets (some of which may not be producing much if any cash flow) that might be particularly attractive to charities.
Generally, the amount of a charitable deduction for a contribution of property is the property’s fair market value. However, the type of property donated, among other factors, will dictate how the exact amount of the charitable deduction is determined.1
Closely Held Business Interests
Closely-held business interests include interests in general and limited partnerships, corporations (and a charity can now be an S corporation shareholder) and limited liability companies. A donor generally will be entitled to claim a charitable deduction based on the fair market value of the gift on the date the contribution is made, provided the interest has been held by the donor as a capital asset for more than one year. Also, in valuing an interest in a closely-held business, a valuation discount may apply because of the limited market for the interest and/or the lack of management control inherent in the interest.
The donor should be mindful of any shareholder, partnership, etc., agreement also, and should confirm that it permits the transfer of the interest to a charity. In certain cases if the closely-held business has a certain type of debt, or if the donor is subject to ordinary income tax consequences as a result of the disposition of the interest, certain adverse tax consequences can follow. For these reasons and because of the general complexity of transferring closely-held business interests, a tax advisor should be consulted prior to contribution.
A gift of real estate, owned longer than one year as a capital asset, generally entitles a donor to a charitable deduction equal to fair market value. However, charitable gifts of “partial interests” in property are not deductible, with three important exceptions:
A Gift of a Remainder Interest in Real Estate > A gift of a remainder interest in a personal residence2 provides one of the best ways to make a charitable gift while retaining the current use and possession of the property. The charitable deduction is equal to the present value of the remainder interest that will eventually pass to the charitable organization (and this includes any community foundation) at the donor’s death. The life estate reserved by the donor can be for a life (or lives, e.g., the donor and the donor’s spouse), or for a specified term of years.
A Gift of an Undivided Interest → A fair market value deduction is allowed for an undivided interest in property (e.g., a 30% tenant-in-common interest in a tract of real estate).
A Gift on Property in a Qualified Trust → A deduction is permitted for a gift of a remainder interest in the form of a “qualified trust” such as a charitable remainder trust or pooled income fund.
If the gifted interests are encumbered by a mortgage, the charitable contribution is limited, and negative income tax consequences will likely ensue. Again, a tax advisor should be consulted prior to making these types of gifts to charity.
Tangible Personal Property
Gifts of tangible personal property include items such as works of art, collectibles, books, antiques, household furnishings, jewelry, cars, boats, and planes. The amount of the deduction is the fair market value of the property, if the property is related to the charity’s purpose or function. A contribution of tangible personal property that is unrelated to the charity’s purpose or function must be reduced by the amount of gain that would occur if the contributed property had been sold by the donor for its fair market value at the time of the contribution. Therefore, for unrelated property, the value of the contribution is the lesser of the donor’s income tax basis in the property or its current fair market value.
In the case of donations of works of art, a donor who also owns the copyright to the work of art must donate both the work of art and the copyright to the charity in order for the donation to qualify for the charitable income tax deduction. Also, a gift of a future interest in tangible personal property does not result in an immediate income tax charitable deduction.
Donors who contribute clothing and household items that are in good used condition or better, generally can deduct the fair market value of such contributions regardless of whether the property is used for the charity’s exempt purpose or an unrelated purpose.
Seek Assistance From Your Tax Advisor
Donors claiming a deduction for charitable non-cash contributions must file Form 8283 (Non-Cash Charitable Contributions), if the total claimed value of all property contributed to the charity exceeds $500. If the value exceeds $5,000, the donor must in all events have a written qualified appraisal and must submit Form 8283 to the charity for completion of Section B, Part IV (Donee Acknowledgement). Also, if a donor wishes to take a deduction of more than $500,000 for a contribution of non-cash property, the donor must provide the written qualified appraisal to the IRS with his or her federal income tax return.
In addition to these general substantiation requirements, a number of other (more restrictive) specific rules can apply depending upon the type of property gifted. For example, contributions of closely-held business interests valued at as little as $10,000 must be substantiated by an qualified appraisal attached to the donor’s income tax return.
Nevertheless, many good opportunities remain to make very beneficial and valuable gifts of non-cash assets to support deserving philanthropic ventures during this period of economic uncertainty. We encourage each donor to consult with a tax advisor in order to maximize the ability of the donor to make the appropriate charitable contribution decisions.
1 For individuals, deductions for non-cash contributions are limited to 30% of adjusted gross income with a five year carry forward for the unused portion of the deduction. Corporations may deduct up to 10% of taxable income, with a five year carryover.
2 Vacation or recreational homes qualify as a personal residence. This deduction also applies to farms or qualified conservation easement contributions.