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Giving Away Gifts of Property to Charity
At first glance, the tax rules for charitable donations seem relatively simple: You write out a check to a charity and deduct it on your federal tax return. What's so hard about that? However, when your charitable donations include gifts of appreciated property, the rules are much more complicated. In fact, they can be downright confusing.
Starting point: For this purpose, "appreciated property" is property with a fair-market value in excess of your basis. Ordinarily, your basis is what you paid for the property. But your basis for depreciable property is reduced by the depreciation deductions allowed over the years. In addition, if you acquired the property by gift, you assume the same basis as the donor had immediately before the gift.
That isn't too hard to follow-at least not yet. But a different set of rules apply depending on how long the property has been held. This is where things can really get sticky. For this purpose, the deduction for donated property that has been held for one year or less is limited to the property's basis.
Example 1: Mr. Stewart contributes shares of stock worth $3,000 to a charity. He bought the stock two months ago for $1,500. In this case, his deduction is limited to $1,500.
On the other hand, there's a different rule for property that has been held longer than one year. In this case you can generally deduct the full fair-market value of the property. In other words, the appreciation goes untaxed.
Example 2: Assume the same facts as before, except that Stewart bought the stock more than a year before he makes the charitable contribution. As a result, he can deduct the full $3,000. The $1,500 of appreciation is tax-free.
Note that there are several pitfalls to watch out for. In some cases, your deduction for property that has been held for more than one year may be limited to your basis.
Let's say that you contribute tangible personal property that is put to an "unrelated use" by the charity. For instance, a painting donated to an art museum and displayed in a prominent place would be related to the use. But artwork given to a medical clinic and shoved away in a storeroom somewhere is not.
Furthermore, other special rules may apply to gifts of appreciated property. For example, no deduction is allowed for a gift of a "future interest" in tangible personal property (i.e., the charity does not receive present possession of the property). Finally, deductions for charitable donations may be reduced for certain high-income taxpayers.
Consult with your tax adviser concerning any gifts you are contemplating. This is the safest route to take.