Do you own a prized piece of art that you’d like to donate to charity? If you meet the requirements for gifts of property, you may qualify for an enhanced tax deduction. But be aware of potential pitfalls along the way.
Normally, your deduction for donated appreciated property is based on the cost when you acquired it. For example, if you paid $7,500 for a sculpture and it’s now worth $10,000, your deduction is limited to $7,500. However, if the property would have produced a long-term capital gain had you sold instead of donating it (i.e., you’ve owned it for more than a year), you can deduct the full fair market value (FMV). In other words, you’re then entitled to deduct a higher amount, even though you never paid tax on the appreciation in value. In our example, after one year you could deduct $10,000, the sculpture’s FMV on the donation date.
The tax law generally limits your annual deduction for charitable gifts of property to 30 percent of adjusted gross income (AGI). If you can’t squeeze under the AGI threshold in a given year, the excess is carried forward for up to five years.
Yet there’s still another tax hurdle to overcome. If you donate property like artwork, the gift must be used to further the charity’s tax-exempt function. Otherwise, the deduction is limited to the property’s cost. For example, if you donate a family heirloom to a museum, you can claim the higher deduction based on FMV if it is prominently displayed. However, if it’s relegated to a dusty storeroom, your deduction is limited to the lower amount. In the event that the value of artwork has declined since you acquired it, your deduction is limited to the FMV, regardless of how long you’ve owned it.
Finally, the tax law imposes strict record keeping requirements on such charitable gifts, including independent appraisals for donations exceeding $5,000. If you have questions about your donation, give our office a call.