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How to Donate Property: Avoid a Tax Punishment for a Good Deed

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Nov 18th 2014
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For the most part, when you donate monetary gifts to charity, whether it’s in cash, by check or credit card charge, you can deduct the full amount on your tax return as long as you meet IRS substantiation requirements. But the tax rules for contributions of property are a little trickier. Nevertheless, with some careful planning, you’ll be rewarded for your generosity—and can even avoid tax on property that has appreciated in value.

Start with this basic premise: If you giving up property you’ve acquired within the last year, you can only deduct your basis in the property (normally, what you paid for it). For example, let’s say you acquired stock on November 1, 2013, that you donate to your alma mater on October 15, 2014, when it’s worth $15,000. In this case, your deduction is limited to $10,000. Thus, you receive no tax benefit from the $5,000 of appreciation in value.

Conversely, if you’ve owned the property long enough for it to qualify for long-term capital gain if you had sold it (i.e., for more than one year), you can deduct the property’s fair market value (FMV) on the date of the donation. Going back to our example, if you hold the stock acquired on November 1, 2013, until at least November 2, 2014, you can deduct the stock’s FMV on that date. To add icing on the cake, the appreciation of value remains untaxed forever. In this scenario, it pays to hold the stock a little longer even if it dips a little in value.

The tax law limits your current deduction for charitable gifts of property to 30 percent of your adjusted gross income (AGI) for the year. But you can generally fit under the 30 percent-of-AGI threshold. Any excess is carried forward for up to five years.

Of course, as is usual with tax planning, you may have to contend with a few extra wrinkles. For instance, if you donate property that isn’t used to further the charity’s tax-exempt function, your deduction is limited to the property’s basis. This might occur, as an example, if you donate a family heirloom to a museum, but the artwork is never displayed. Make sure your gift is contingent on the charity using it properly.

Also, suppose that property has declined in value since you acquired it. When you donate the property, your deduction is limited to its FMV, regardless of how long you have held it. And you can’t deduct the difference between your basis and the FMV either. So, if you donate stock acquired for $10,000 and now it’s worth $8,000, your deduction is limited to $8,000.

Finally, be aware that certain itemized deductions claimed by upper-income taxpayers, including deductions for charitable donations, are reduced under the Pease rule. This might have an impact on charitable gift-giving in 2014.

Whether or not property has appreciated or depreciated in value, you should obtain an independent appraisal of its current value if it’s not easily ascertainable as it is with stock. Remember that the IRS requires independent appraisals for property donations exceeding $5,000.

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