November 05, 2012
Charitable Contributions of Property
As the year end approaches many taxpayers are planning on making some last minute charitable contributions for the 2012 tax year. While most taxpayers focus on making cash donations, this article will specifically address contributions of property to a charitable organization.
To receive a charitable contribution deduction for a donation of property; the taxpayer must surrender dominion and control over that property. A contribution of a right to use property the taxpayer owns, for example a rent-free lease, is a contribution of less that the taxpayer’s entire interest in the property and is not deductible.
This can be illustrated as follows:
- Taxpayer owns a three-story office building and donates rent-free use of one floor to a charitable organization. Since the taxpayer still owns the building and the taxpayer contributed a partial interest in property, the taxpayer cannot take a charitable contribution deduction for the organization’s use of the property on their tax return.
Instead of providing property to a charitable organization, a taxpayer may opt instead to sell the property to the charity at a discount i.e., a bargain sale. In a bargain sale the taxpayer/donor sells property to a charity organization at less than its fair market value, with the intent to provide a benefit to the charity equal to the amount of the discount.
A bargain sale has elements of both a sale transaction and a charitable contribution and is often referred to as a part-sale, part-gift transaction. A taxpayer who makes a bargain sale to a charity is typically entitled to a charitable contribution deduction equal to the excess of the fair market value (“FMV”) of the property over the sales price of the property.
If a taxpayer contributes property to a qualified charitable organization, the amount of the charitable contribution is based on the FMV of the property at the time of the contribution unless the property is short-term capital gain property (capital assets the taxpayer has held for 12 months or less) or ordinary income property (property created by the donor or inventory). A charitable contribution of short-term capital gain or ordinary income property is limited to the taxpayer’s basis in the contributed property.
A bargain sale can only result in a charitable contribution deduction if all of the statutory requirements are met, including a requirement of charitable intent. In order for the gift portion of a bargain sale to qualify for a charitable contribution deduction, the bargain sale must be out of a charitable intent on the part of the donor, as opposed to being an involuntary transfer, a transfer made to satisfy an obligation, or to obtain some personal benefit unrelated to furthering the purposes and objectives of the charity.
In addition to producing a charitable contribution deduction, a bargain sale usually results in a taxable sale transaction, with the amount realized being equal to the sales proceeds. In a bargain sale the entire income tax basis of the property may not be utilized in determining the amount of taxable gain in the sale transaction. Instead the tax basis of the property must be allocated between the portion of the property assumed sold and the portion of the property assumed contributed. The allocation of tax basis of the property is based on the relative fair market value.
Sometimes property is donated to a charitable organization subject to debt. Donating property subject to debt generally results in both a sale transaction and a charitable contribution deduction. The recognized gain on the sale transaction results from the transfer with sale proceeds equal to the amount of the debt. The charitable deduction is its FMV less any ordinary income that would have been recognized had the property been sold rather than contributed to the charitable organization. If the debt is not assumed or fully assumed and the taxpayer remains liable on the debt, additional charitable contribution deductions are available as the taxpayer makes payments on the debt.
It is not always a good tax idea to make a charitable contribution of property. For property that has declined in value, it is important to note that the charitable contribution deduction allowed is limited to its FMV at the time of contribution and any loss is not deductible. Therefore, it is generally advisable from a tax standpoint to sell the property, recognize the loss assuming it is deductible, and then donates the cash proceeds to the charitable organization.
Charitable contributions are subject to 50%, 30% and 20% adjusted gross income (“AGI”) limitations. The first 50% limitations provides that deductible gifts including those subject to separate 20% or 30% limitations cannot exceed 50% of the Taxpayer’s AGI. The second 50% limitation refers to contributions to certain types of charities.
The first 30% limitation applies to gifts to non-50% charities such as veteran’s organizations, domestic fraternal societies, nonprofit cemeteries and certain private foundations. The second 30% limitation applies to gifts of capital gain property to a 50% charity as has been discussed in this article. Taxpayers willing to limit their deduction to the tax basis of the property can elect to use the 50% AGI limitation rather than the 30% AGI limitation for capital gain property contributed to a 50% charity.
Gifts of capital gain property can be limited to 20% of AGI if the contribution is to non-50% charities which are mainly family-funded private foundations. The only way to apply the 50% AGI limitation to a gift of capital gain property is to elect to use the property’s tax basis as the charitable contribution deduction rather than its fair market value.
Charitable contributions are deducted on a first in first out basis. Any deductions not allowed due to the AGI limitations retain their percentage limitation character and carryover to the succeeding tax year. The contribution can carry forward five years. Any carry forward not fully used by the end of the five-year period expires with no benefit to the taxpayer.
Charitable contribution deductions are allowed for contribution of property if certain prescribed and progressively stringent documentation requirements are met depending on whether the deduction is above the $500, $5,000, or $500,000 thresholds. For contributions of property for which a deduction of $500 or more is claimed, the donor must include a description of the contributed property with its return for the taxable year of the contribution on Form 8283, Noncash Charitable Contributions.
In the case of a contribution of property for which a deduction in excess of $5,000 is claimed, the donor must obtain a qualified appraisal and must attach it to its tax return for the taxable year of the contribution. The taxpayer must attach a completed Section B (Appraisal Summary) of Form 8283 signed by the appraiser to the tax return. Also, the charitable organization must complete a portion of Form 8283.
If a deduction of more than $500,000 is claimed, the donor must attach a qualified appraisal to its return for the taxable year of the contribution. The appraisal must be done not earlier than 60 days before the donation and received by the donor no later than the due date including extensions of the taxpayer's return.
If the reporting requirements detailed above are not met, the IRS can and generally does deny the charitable contribution deduction for the contribution of the property to the charitable organization. Accordingly, it is advisable to consult your tax advisor when contemplating any donation of property. Additionally, a tax analysis should be undertaken so that the taxpayer is aware of the tax benefits or expenses associated with any contribution of property.