How to Get an Income Tax Deduction for Contributions of Property to Charities

You can get a deduction in computing income tax in the USA for contributions to charities. Deductions are allowed for cash or property. Special rules apply, though, for contributions of property. The rules differ for contributions of differing types of property. This article summarizes the rules.

To be deductible, the contribution must be to an organization that qualifies as a charity under IRS rules. A charity can tell you if it qualifies. It MUST have an employer identification number to qualify, and it MUST have applied to the IRS for qualification. The charity should tell you this information. If they don’t have it, they may not be a qualified charity.

The amount of deductible is generally the fair market value of the property. However, the deduction for contributions of certain types of property is limited, as discussed below.

Valuation of Property

Deductions for contributions of property are based on the fair market value of the property at the date of the contribution. For property for which a regular market exists and for which prices are readily determinable, the value is based on such market. Thus, stocks, bonds, mutual funds, traded commodities, traded futures contracts, and foreign currency values are those quoted on such markets. For other property, the valuation is often contested by the IRS, even where there is an appraisal. Appraisals by a qualified appraiser are required for contributions of property valued above $5,000.

Vehicles present special problems, since the exact condition of the vehicle is often hard to document. The “blue book” value may bear little resemblance to the actual value. Example: Bill donates his 2002 Toyota to Cars for Kangaroos when the full retail price for an excellent condition one is $4,500. However, Bills car has body damage, the engine doesn’t run, and the transmission’s broken. The car is clearly not worth $4,500, in spite of what the tow truck driver tells Bill. Bill must get a believable receipt from the charity to prove his deduction.

More information is available in Income Tax in the USA, 2013 edition.

Personal Property Contributions

The income tax deduction for contributions of personal property is generally limited to the taxpayer’s basis in such property plus the amount of capital gain (but not ordinary income) the taxpayer would recognize if the property were sold. Thus, the deduction for contributions of business items (inventory, equipment, etc.) may be limited to basis. Significant exceptions are discussed below.

The deduction for contribution of publicly quoted stock by other than a dealer in securities is generally the fair market value of such stock or securities. No deduction is allowed for stock or securities issued by the taxpayer. Example: Phil founded Phillow, a software company, contributing $50,000 for his shares. After going public and numerous stock splits, Phil owns 100 million shares, worth $100 each. Phil contributes 10,000 shares of Phillow stock to a 501(c)(3) organization that is not a private foundation. Phil gets a deduction of $1 million for the contribution.

A contribution of a future interest in tangible personal property is considered made only when all intervening interests have expired.{26 CFR 1.170A-5} A contribution of less than a full interest in personal property is also subject to other limitations.{26 CFR 1.170A-7}

To be deductible for income tax purposes, contributed household items (clothing, furniture, etc.) must be in good or better condition and of more than minimal value. Household items, for this purpose, do not include food, artworks, jewelry, or collectables, or donated items worth more than $500 if a qualified appraisal is attached to the taxpayer’s return. Example: Sam purchased an antique chair for $10,000. The chair was not in good condition, but had been used by the town’s founder. Sam donated the chair to the local museum, and attached appropriate appraisals to his return. Sam gets a deduction for the appraised value of the chair.

Intellectual Property Contributions

Contributions of intellectual property are limited to the smaller of the taxpayer’s adjusted basis in the property or the property’s fair market value. In addition, however, the taxpayer may claim a charitable contribution deduction for a percentage of the income the charity receives from the property.{26 USC 170(m)} This percentage is 100% for the first year ending on or after the date of the contribution, and declines by 10 percentage points per year, ending with a 10% deduction for the 11th and 12th years. However, the additional income-based deductions cannot be claimed until the cumulative amounts exceed the original deduction. For this purpose, intellectual property includes patents, copyrights, trademarks, trade names, trade secrets, know-how, software not available to the general public for purchase, and similar property. Example: Jane develops a new invention and donates the patent to the university where she works. Jane can deduct the value of the patent as well as the university’s income from licensing the patent.

Real Property Contributions

Contributions of interests in real property to the types of organizations and uses above are generally deductible. However, due to the nature of real property and the variety of possible interests therein, several additional rules apply.

Types of Interests in Real Property

Interests in real property can consist of outright ownership (fee simple interest), interests in minerals in place in the ground that have no rights to the surface other than access (mineral interests), and partial interests. Partial interests may include a joint ownership, lifetime right to use, rights to access or specific use, residual interests following lapse of other interests, and other types of rights often called easements. Each of these interests is a bundle of specific rights to use of the property, is generally transferable, and generally has value on its own.

Example: Noel Bob owns 40 acres of farmland outright and has a 40-year farming easement an adjacent 40 acres. His house is on the corner of his 40 acres, including a half acre yard. The easement is transferable. Noel decides to retire. He sells the entire farming rights, in perpetuity, for his 40 acres, retaining a life interest in the house and yard. He also sells the farming easement. He transfers as a gift to his children the remainder interest in the house and yard. He transfers the remainder interest in the farm land to the state college farming program. These transfers must be analyzed separately for tax effects.

Contribution of Partial Interests in Real Property

A contribution of a remainder interest in a personal residence where the donor retains a life interest is generally deductible if the other requirements for deduction are met.{26 CFR 1.170A-7} Example: Ellen transfers to her church a remainder interest in her house, retaining a life interest (expiring on her death). Ellen can claim a deduction for the value of the remainder interest, which is generally determined based on the current fair market value of the house and mortality tables.

A transfer of an undivided interest in all of a property is also generally deductible, as are transfers of full interests in specific, severable aspects of the property (such as mineral rights).

A deduction is permitted for contribution of a remainder interest in the donor’s primary or secondary residence or form.{26 USC 170(f)(3)(B); 26 CFR 1.170A-7(b)} Transfers of other partial interests are deductible only if the transfer would be deductible if transferred in trust.

Contributions Made in Trust

A contribution may be made directly to a charity or in trust. However, to be deductible a contribution in trust must meet additional requirements.{26 USC 170(f)(2)} A contribution of a future interest in property other than a personal residence is deductible only if the trust meets certain requirements. The trust must be either a pooled income fund maintained by the charity, a charitable remainder trust that pays the noncharitable beneficiary a fixed annuity, or a charitable unitrust that pays a fixed percentage of annual asset value of the trust.

Insurance and Annuities

A taxpayer may contribute an insurance policy or annuity to a charity and claim a deduction for the value of the policy or annuity. An individual may also purchase an annuity from a charity for more than the value of the annuity and claim a deduction for the excess. However, the deduction is not allowed if the charity must pay part of the premiums, with exceptions.{26 USC 170(f)(10)}

Special Fully Deductible Items

Certain types of contributions are subject to the 50% limit and deductible at full fair market value regardless of other restrictions.{26 USC 170(e)} These include items described in the following paragraphs.

Real Property

A contribution of an interest in real property to a governmental entity or a private foundation (or a subsidiary thereof) is fully deductible at fair market value if the interest will be used for a broad range of recreation, historic, or scenic purposes.{26 USC 170(h)} The use need not be open to the public. The interest can be merely a deed restriction preventing certain types development, or may be outright ownership of the land or buildings. Special rules apply with respect to historic buildings. Example: King Jim owns a mansion and 500 acre estate in New Jersey which he plans to keep in the family and neither sell nor develop. The king’s appraiser says rights to develop apartments on the land would be worth $10 million. The king donates a no-development easement to the New Jersey Kings Land Conservancy, a private foundation, and he retains all other ownership and use of the land, which is not open to the public. The king gets a deduction for $10 million, limited to 50% of his AGI.

Personal Property

Contribution of shares of a corporation (by other than the issuing corporation) are fully deductible (subject to limits based on the donee) if market quotations are readily available for the shares and they are capital assets of the donor.{26 USC 170(e)(5)}

Contribution of certain inventory items is fully deductible subject to some limits. Such property includes:{26 USC 170(e)}

- Contributions by a corporation of items for use by the charity in care of the ill, needy, or infants, where the donor receives no consideration. However, the deduction is reduced by half the gain the taxpayer would have recognized, and is limited to twice the corporation’s basis.

- Contributions of food by any taxpayer, subject to these limitations on use and deduction.

- Contributions of books to public schools, subject to these limitations on deduction, but not use.

- Contributions of new inventory made by the taxpayer to a qualified research organization (including colleges and research labs)

- Contributions by a corporation of new or used computers, peripherals, and software for use by schools or libraries in the USA, where the donor receives no consideration. However, the deduction is reduced by half the gain the taxpayer would have recognized, and is limited to twice the corporation’s basis.

Recapture on Charity’s Disposition of Property

If a charity disposes of any of the above specially deductible items within 3 years of the donation, the donor must recapture the deduction. However, an exception applies where the charity makes certain certifications of use of the property.{26 USC 170(e)(7)}

Assumption of Liability by Charity

A charity may assume a liability of the taxpayer in connection with the contribution. The amount assumed reduces the fair market value of the contribution. If the liability exceeds the value of the property, the taxpayer must recognize gain. Any interest on the liability attributable to periods before the contribution is not deductible by the taxpayer.{26 CFR 1.170A-3}

Prove It!

It is up to the taxpayer to prove the deduction if the IRS comes calling. The following records are required:

- A receipt from the charity indicating what was contributed, the value, the name and address of the charity, and the charity’s employer ID number. This is required for contributions of cash or property. For contributions of property valued above $500, this information must be disclosed on Form 8283 filed with the taxpayer’s income tax return.

- A suitably detailed description of property contributed and its condition. For real property, this means something sufficiently specific to identify the property (such as “house at 123 Easy Street, Niceville, GA”), but need not be the full legal description. For personal property, the description need not identify a particular article (like a serial number or CUSIP number) but should be complete enough to understand what the property is (such as model number or number and class of shares). Note: a vehicle identification number is required for contributions of vehicles.

- An appraisal if the property is valued above $5,000. This must be attached to the taxpayers income tax return. The appraisal is not required for publicly traded securities (stocks and bonds). Both the charity and the appraiser MUST sign Form 8283, or the IRS will disallow the deduction.

- Records demonstrating the taxpayer’s basis in property if the deduction is limited based on basis. These include records of cost of goods produced or acquired.

- For significant contributions of tangible property, pictures help prove the condition of the property.

- For property (e.g., land, patents) with a non-negotiable title, a copy of the written contract transferring title.

Summary

Contribution of property can give you a significant income tax deduction. Where you contribute all rights to the property, the contribution is generally fully deductible, but your deductions may be limited based on your AGI. Deductions for contributions of inventory are generally limited to basis (cost). Where contributions are of less than all rights, additional limitations apply. Generally, all rights to personal property must pass to the charity to get a deduction, but deductions are allowed for portions of rights to real property. The taxpayer must prove the deduction, and must file Form 8283 for deductions in excess of $500. Appraisals are required for contributions of property valued above $5,000.

More information on getting deductions for contributions is available in Income Tax in the USA 2013, ASIN B00BCSNOGG, available at Amazon.com