Special tax break for gifts of property
Facebook founder Mark Zuckerberg made news recently by promising to give away 99% of his net worth, including his Facebook shares, to charity. The arrangement takes advantage of a unique tax break for charitable gifts of appreciated property, such as stock.
Background: If you have held property long enough for it to qualify for a long-term capital gain if you had sold it—in other words, more than one year—you can deduct an amount equal to the property’s fair market value (FMV). On the other hand, if the property would not qualify for long-term capital gain treatment on a sale, your deduction is limited to your basis in the property, which is often its original cost.
Therefore, this rule can change the way you give property to charity. For instance, suppose you own stock you bought for $5,000 10 months ago. The stock is currently worth $7,000. If you give the stock to charity today, you can deduct only your basis in the stock, or $5,000. However, if you wait more than two months to donate the stock, your deduction is increased to its FMV, or $7,000. In other words, you receive the tax benefit of appreciation in value when you donate property held more than one year. You are never taxed on the $2,000 appreciation in value.
However, there may be a few other potential obstacles to overcome. Significantly, if you donate property that is not used to further the charity’s tax-exempt function, your deduction is limited to your basis in the property. For example, if you donate artwork to your alma mater, insist on having the school display the art in a place where students can view it and study it. As a result, you can deduct the art’s FMV, assuming you owned it for more than one year. Conversely, if the school simply keeps the art in a storeroom, you get no tax benefit from the appreciation in value.
What happens if the property has depreciated in value? In that case, your deduction is limited to the FMV, regardless of how long you have held the property.
Also, be aware that certain itemized deductions are reduced for high-income taxpayers. This reduction applies to deductions for charitable gifts.
Regardless of whether property has appreciated or depreciated in value, it is recommended that you obtain an independent appraisal of the property’s current worth. This is the best proof you can have if your deduction is ever challenged. The IRS requires an independent appraisal for property donations exceeding $5,000.