While charitable gifts of cash are straight forward, complications can and do arise when you make a gift of appreciated property.
Appreciated property has a current fair market value higher than your tax basis in the property. Basis is the yardstick for measuring gain or loss, and, usually, is the original amount you paid for the property. However, special basis rules apply for inherited property, or property acquired by gift, as well as property for which depreciation deductions are allowable, such as property used in a trade or business.
Your charitable deduction will depend upon whether the appreciated property is ordinary income property or capital gain property. Ordinary income property includes inventory and capital assets owned for one year or less. Capital gain property includes capital assets you owned for more than one year, as well as certain real and depreciable property used in a business.
In general, your deduction for ordinary income property is limited to your basis. For example, say you bought stock five months ago for $5,000. It is now worth $8,000. An immediate contribution of the stock would give you a deduction of $5,000, not $8,000. Now, suppose you bought the stock more than one year ago for $5,000, and, again, contribute it when it is worth $8,000. Here, you normally would be able to deduct the full $8,000. Plus, you would not be taxed on the $3,000 in appreciation. That is a far better result than if you sold the stock, paid tax on the gain, and contributed the remaining proceeds to charity.
Unfortunately, not all contributions of appreciated capital gain property give you a deduction for the full value of the property. Rather, your deduction is limited to basis in some cases, including when you contribute tangible personal property, which is put to an unrelated use by the charity. For example, if you contribute a painting to a hospital, and the hospital uses it for display, the use of the painting would be unrelated to the hospital’s charitable purpose, and your deduction would be limited to your basis in the painting. On the other hand, a painting contributed to a museum, and used for display by the museum, would not be an unrelated use, and your deduction would not be limited.
As you can see, contributions of appreciated property to charities are a bit more complicated than run of the mill cash contributions. Please contact our office for more information about making gifts of appreciated property.
Pearce, Gray and Co. is located at 3514 N. Power Road, Suite 135. Call (480) 835-1124.
Brian L. Bentley, CPA, is a partner at Pearce, Gray and Co., and has been with the firm for more than 10 years. He focuses on small businesses and multi-state taxation.