Giving Tangible Personal Property to Charity: What You Need to Know
December 6, 2007
Lauren A. Jenkins- Northern Virginia
The charitable income tax deduction generally allows a taxpayer to deduct the value of his contributions to charity on his federal income tax return. Although it is not difficult to value charitable contributions of cash or publicly traded securities, valuing contributions of tangible personal property, such as household contents, clothing and cars, may prove challenging. To ensure that taxpayers do not overvalue their donations to charitable organizations, the IRS imposes requirements for valuing such contributions for purposes of the charitable deduction.
Charitable contributions may be deducted only if they are made to qualified organizations. Generally, qualified organizations are non-profit groups that (1) are “religious, charitable, educational, scientific, or literary in purpose, or that work to prevent cruelty to children or animals,” and (2) have favorable determination letters from the IRS, indicating tax-exempt status under Section 501(c)(3) of the Internal Revenue Code. Churches and similar religious organizations are generally not required to have an IRS determination letter. One can determine if a particular charity is considered a qualified organization by asking the charity itself or consulting IRS Publication 78, which lists most qualified organizations, and can be found at http://apps.irs.gov/app/pub78.
The measure of the tax deduction available when property is donated to a qualified organization is generally its fair market value. Fair market value is defined in the Internal Revenue Code as the “price at which property would change hands between a willing buyer and willing seller, neither being under any compulsion to buy or sell, and both having reasonable knowledge of relevant facts.” In other words, it is the price that property would sell for on the open market.
A different set of rules applies when the contributed property has a fair market value that exceeds the taxpayer’s basis in it. This situation rarely occurs in the case of clothing, household goods or used cars, but is more likely to apply to works of art, antiques and collectibles. If the donated property would give rise to a long-term capital gain when it is sold (e.g., collections, vehicles and other capital assets held for more than one year), the taxpayer may generally deduct the fair market value of the property if the charity will use it in a manner related to its tax-exempt purpose – for example, if the donated work of art will be displayed by the recipient museum.
If, however, the donated property is tangible personal property and it is going to a charity that will simply sell it – for example, if a work of art is donated to a homeless shelter that will simply sell it for whatever price can be obtained – then the taxpayer’s deduction is limited to his basis in the property. If the donated property would give rise to ordinary income or short-term capital gain if sold (e.g., works of art created by the taxpayer, or “capital gain assets” held for one year or less), the taxpayer’s deduction is generally limited to his basis in the property. Because of all these variations in the rules, the taxpayer should consult a tax professional.
Depending on the type and value of the property donated, the IRS may require the taxpayer to obtain a qualified appraisal prepared by a qualified appraiser. A “qualified appraiser” is generally someone who is regularly paid to perform appraisals, meets all of the educational and experience qualifications set forth by the IRS, and has not been included on the IRS’s appraiser disqualification list during the past three years before the appraisal is performed. A “qualified appraisal” is generally an appraisal that is prepared by a qualified appraiser, follows IRS guidelines and is made not more than 60 days before the property is donated to the charity.
In certain circumstances (discussed below), the taxpayer will have to submit the qualified appraisal with his tax return. Generally, the qualified appraisal should be kept with the taxpayer’s other records that support the value of the donation if it is requested by the IRS. Although the charitable deduction does not include the fees paid to appraise the property, these fees may be eligible for a miscellaneous itemized deduction subject to the 2 percent limit on the taxpayer’s income tax return.
Many taxpayers claim deductions for donations of clothing and household goods. This category includes furniture, electronics, appliances, furnishings and similar items, but not works of art, antiques, jewelry and collections. The fair market value of clothing and household items is typically the price that would be paid for such items in a consignment or thrift store.
In 2006, new laws were enacted limiting the amount of deductions that could be taken for donations of clothing and household goods. In general, taxpayers may claim a charitable deduction for contributions of clothing and household items only if the items are in good used condition or better. A taxpayer does not need to obtain a qualified appraisal for donations of clothing and household items that are in good used condition or better unless the deduction exceeds $5,000. However, if a taxpayer donates a single household item or item of clothing that is not in good used condition or better, he may claim a tax deduction only if the item’s value exceeds $500 and must submit a qualified appraisal with his tax return.
Automobiles are another popular item donated by taxpayers, and charities typically sell the donated vehicles to raise funds. Generally, a taxpayer may deduct the lesser of (1) the gross proceeds received by the charity from the sale of the vehicle, or (2) the vehicle’s fair market value on the date it was donated to the charity. The fair market value of an automobile can usually be determined by a car pricing guide. The taxpayer should use the price listed for the sale of a vehicle to a private party with the same specifications as the vehicle being donated. In addition, the charity will provide the taxpayer with a Form 1098-C (or similar statement), which will show the gross proceeds from the sale of the vehicle; it must be filed with the taxpayer’s income tax return.
Different rules apply if the charity does not resell the donated motor vehicle, but keeps it to be used in its charitable functions. If the charity uses the vehicle to further its charitable purposes, the taxpayer can generally deduct the vehicle’s fair market value at the time of contribution. Examples of such uses include using the vehicle in its regularly conducted activities, giving the vehicle to a needy individual, or selling the vehicle to a needy individual for a price significantly below fair market value.
Paintings, antiques, and other works of art are frequently donated to charity. A taxpayer should obtain a qualified appraisal if he is claiming a deduction of over $5,000 for his donation of art. The taxpayer is required to submit the qualified appraisal with his income tax return if the value of his donation exceeds $20,000. If the value of the piece is $50,000 or more, the taxpayer may request a Statement of Value from the IRS. The taxpayer can then rely on the Statement of Value when claiming the charitable deduction on his income tax return.
For donations of most other tangible items, including jewelry and collections, a taxpayer is required to obtain a qualified appraisal if he is claiming a deduction of over $5,000. However, the taxpayer is not required to submit the qualified appraisal with his income tax return. If the deduction is over $500,000, then the qualified appraisal must be submitted with the taxpayer’s income tax return. In addition to the qualified appraisal requirements, a taxpayer must file a Form 8283 with his tax return if the amount of his deductions for all non-cash charitable contributions is more than $500.
The charitable deduction allows taxpayers to receive a benefit on their income tax return by making donations to qualified organizations. Although this article summarizes some of the rules surrounding charitable deductions, there are many exceptions. Also, depending on the donor’s tax situation, limitations or “phase-outs” may apply to reduce the tax benefit of a charitable contribution. It is important to enlist the assistance of tax professionals for advice regarding the tax implications of a particular donation.
Below is a chart that shows when the taxpayer is required to obtain a qualified appraisal, and whether it must be filed with the taxpayer’s income tax return:
For more information, email Lauren A. Jenkins at lauren.jenkins@hklaw.com or call toll free, 1-888-688-8500.