Why does it matter what type of property is donated to charity?
You can donate many different types of property to charity. The amount of your charitable deduction for income tax purposes depends partly on the type of property you donate.
In summary, and with more details below, the general rule is that your charitable deduction is limited depending on the type of property you donate and the classification of the charity as a public charity or a private foundation.
Any amount that cannot be deducted in the current year can be carried over and deducted for up to five succeeding years (the carryover rule), assuming you continue to itemize deductions.
What are the different types of property that can be donated to charity?
There are six general categories of property you can donate to charity:
- Cash
- Long-term capital gain property
- Ordinary income property
- Tangible personal property, where the charity’s use of that property is related to the functions of the charity
- Tangible personal property, where the charity’s use of that property is unrelated to the functions of the charity
- Future interests in property
1. Cash
This is the easiest item to donate to charity. If your charity is a public one, your deduction is limited to 50 percent of your contribution base (your contribution base is generally equal to your adjusted gross income). The value of your gift is simply the amount of cash donated. The carryover rule applies so that any amount that cannot be deducted in the current year can be carried over and deducted for up to five succeeding years.
2. Long-term capital gain property
Long-term capital gain property is property that would have produced a long-term capital gain if it had been sold rather than donated to charity. Remember, a gift to charity is not the same as a sale to charity. Capital gain is considered “long term capital gain” when property to which it applies has been held longer than 12 months.There are three types of long-term capital gain property:
- Real property such as land and condos
- Intangible personal property such as stock
- Tangible personal property, such as a car, sculpture or jewelry
When you donate real property and/or intangible personal property which has long-term capital gain to a public charity, your deduction is limited to 30 percent of your contribution base. The carryover rule applies. The full fair market value (FMV) of the asset is used to determine your charitable deduction.
Example: Suppose you donate stock with a current FMV of $50,000 to a public charity. Ten years ago, the stock cost $15,000. The result is that the full FMV of the stock is deductible, limited by the percentage rules. If your contribution base is $100,000, your deduction for the present year is $30,000 (30 percent of $100,000). You can then carry over and deduct the $20,000 balance of your available deduction in the following year.
3. Ordinary income property
Ordinary income property is property that would have generated ordinary income (rather than capital gain) if the asset had been sold rather than donated to charity. Ordinary income property includes:
- Property held less than the requisite long-term period
- Section 306 stock (stock acquired in a nontaxable corporate transaction) any gain recognized upon the sale of Section 306 is treated as ordinary income
- Works of art, books, letters, and musical compositions, but only if given by the person who created them or for whom they were prepared
- Inventory
If you donate ordinary income property to a public charity, your deduction is limited to 50 percent of your contribution base. However, the tax code does not allow you to deduct the full FMV of such a gift. Instead, your deduction is generally limited to your actual cost for the property, plus any adjustments such as improvements or depreciation. This figure is commonly referred to as your basis in the property.
Example: Suppose Julie donates one of her paintings that she created worth $50,000 to an art museum. The result is that her deduction would be limited to her cost for producing the painting (canvas, paint, brushes etc.). She would not be entitled to a deduction for the painting’s FMV of $50,000.
Similarly, suppose you donate stock worth $25,000 to a public charity. You purchased the stock four months ago for $12,000. Because the sale of the stock would have resulted in short-term capital gain had you sold it instead of donated it, you can deduct only your basis, in this case, $12,000.
Tip: Gifts of substantially appreciated ordinary income property should be avoided, if possible, because your deduction is based on your basis in the property, rather than the FMV of the property.
4. & 5. Tangible personal property
Tangible personal property includes items such as cars, paintings, and jewelry. The IRS makes a distinction between gifts that will be used by the charity in a manner related to the charity’s functions and gifts that will not be used in a manner related to the charity’s functions.
Example: If you donate a painting to an art museum for display, the use of your gift is related to the museum’s exempt functions. However, if you donate the same painting to the Red Cross, the painting is unrelated to the exempt functions of the Red Cross.
The rule is if the donated property is related to the charity’s functions, then your deduction is the fair market value of the property, limited to 30 percent of your contribution base. However, if the donated property is unrelated to the charity’s functions, your deduction is your basis (cost) in the property, limited to 30 percent of your contribution base. The carryover rule applies in both situations.
6. Future interests in property
A future interest is one that will vest in possession or enjoyment at some time in the future.
Example: Suppose you donate an original painting to the local art museum, but stipulate that the painting is to remain in your home as long as you live. The result is that the museum has a future interest in the painting.
The general rule of charitable gifts is that the gift must actually be paid to the charity in cash or other property before the close of the tax year in order for the donor to be entitled to a charitable deduction for that property in that year. Therefore, a transfer to a charity of a future interest in property is not deductible until the charity has a free and clear right to possess and enjoy the property. The exception to this rule is when the gift of the future interest is in the form of a future interest in trust. Here, the future interest is tax-deductible when the gift is made even though the charity may not enjoy the gift for several years.
The tax laws permit several types of trusts to be used for the purpose of making charitable gifts of future interests, including charitable remainder annuity trusts (CRATs), charitable remainder unitrusts (CRUTs), pooled income funds, and charitable lead trusts. If you comply with the requirements for formation of these trusts as set forth in the Internal Revenue Code and corresponding regulations, you can receive income, estate, and gift tax benefits.
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