Noncash donations can take many forms

Year end is here, a time when gift-giving is on many people’s minds. If you’d like to make a qualified charity a little happier this year, bear in mind that dollars and cents aren’t your only option. Rather than hurting your personal cash flow by lowering the balance on your bank account, you might look to other assets to serve as a valuable donation — with some helpful tax benefits.

Your Home or Vacation Home

Do you own a home or vacation home? If so, donating it to charity may seem like an extreme act of goodwill. Of course, the general idea when people do this isn’t to give away the residence immediately and outright but to give a remainder interest to a qualifying charity for both charitable and income-tax-saving purposes.

In fact, the Internal Revenue Code permits taxpayers to donate a personal residence to charity and receive a current income tax deduction, even though the gift won’t take effect until the taxpayer’s death. Under the rules, the definition of a personal residence includes a:

• Condominium,
• Cooperative apartment,
• Farm, and
• House boat, yacht or motor home (in certain qualifying circumstances).

By donating a remainder interest in your home, you can receive a charitable income tax deduction equal to the present value of the remainder interest based on the current value of the residence and your age. And, because the remainder interest passes to charity upon your death, you will not be subject to estate tax on the property.

A Spare Vehicle

So maybe a home is a little too big of a noncash donation to consider. How about a spare vehicle? Aside from getting the vehicle off your hands, you can take a tax deduction limited to the amount that the charity receives when it sells the vehicle (even if the Blue Book® value is higher). If the charity instead decides to use the vehicle for its own activities, however, you’ll be allowed to deduct the fair market value.

Whichever way the arrangement works out, the charity must tell you how the vehicle was used or whether it was sold and, within 30 days of your contribution or the vehicle’s sale, provide you with Form 1098-C. In addition, the charity must disclose whether it provided any goods or services in exchange for the vehicle and, if it did, give you a good-faith estimate of their value.

Art and Other Collectibles

Are you a collector? Rare paintings? Bejeweled bracelets? Stamps? If so, you can donate all or part of your collection to charity. Besides sharing your passion with others, you may save considerable tax dollars over selling your valuables outright. After all, gains from the sale of collectibles such as art, jewelry, antiques and stamp collections are still taxed at 28%, not the 15% rate that applies to most long-term capital gains.

If you decide to donate collectibles, bear in mind that you’re generally allowed to deduct their fair market value only if the recipient charity uses them for its tax-exempt purpose.

So if, for instance, you give a painting to a nonprofit organization knowing that the organization is planning to sell the painting and invest the proceeds, you can deduct only your cost. But if you donate it to a museum for display or study, you can deduct the fair market value.

Appreciated Stock

Given the rocky state of the stock market over the last year or so, just having appreciated stock may seem like a noteworthy accomplishment — and giving it away may seem out of the question. But donations of this nature remain a tax-savvy strategy.

By giving appreciated stock rather than cash (or the cash proceeds of a stock sale), you may qualify for a tax deduction equal to the stock’s fair market value — just as if you’d sold it and donated the cash. But neither you nor the charity will have to pay capital gains tax on the appreciation.

There are limits: You may deduct appreciated stock contributions in the year of the contribution only up to 30% of your adjusted gross income. And you must have owned the stock for at least one year to qualify for the full deduction. Otherwise, you’ll be limited to what you paid for the stock.

Due Diligence

Making noncash donations isn’t quite as straightforward as making cash ones. In fact, doing so calls for every bit of the due diligence you’d do before investing in a company or the like. Work with your CPA to ensure you do it right.

What’s The Damage? The Cost of Giving

When the waiter at a restaurant brings you the check, you may playfully ask, “What’s the damage?” You probably wouldn’t do that when making a donation, but charitable giving has a cost, too. The good news is that it’s less than the amount you’re actually giving — in some cases less than half as much.

Let’s compare the cost of making four types of $500,000 donations. Assuming you’re in the top federal tax bracket of 35%, have an adjusted cost basis of $150,000 in each of the noncash properties listed below and have taken $100,000 in depreciation deductions on the real estate, here’s how the cost of each gift would break down:

*Factors in the net cost of federal income tax only.

Please contact Feeley & Driscoll's Boston Accounting team by Email or call us at 1 (888) 875-9770.

related links