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Year-end property donations: worth the trouble?

December 22, 2008

Congress has been taking a lot of the zip out of donations of property to charity in recent years. Even so, a property donation can still be the most tax-efficient way to fulfill a charitable pledge before year-end.

When you donate appreciated long-term capital gain property to charity, you get to deduct the entire fair value of the donation without ever including the gain in income. That works out better than selling the property for a gain, paying the tax, and donating the remaining cash.

Aside from the obvious problem here -- who has capital gain property right now anyway? -- Congress has made it more difficult over the years to claim deductions for property gifts.

First they trimmed back the fun of used car donations. Unless the charity uses the car in its operations, you only get to deduct the amount the charity gets for the car when it sells it.

Then they shut down the big-game safari loophole - you don't get a fair market value deduction for stuffed game animals anymore.

Finally, they cut back the deduction for any donations of tangible personal property that the charity won't be using for its tax-exempt purpose; such gifts can only be deducted at their cost basis. For example, if you donate a painting to a museum for their collection, you get a fair market value deduction. If you donate it for them to sell, you can only deduct your cost. This restriction doesn't apply to marketable securities or real estate.

Unless you are donating marketable securities, the tax law requires you to get a qualified appraisal from a qualified appraiser to take any deduction - whether at cost or fair market value - if the claimed value exceeds $5,000. The appraiser will have to sign a Form 8283 that will be attached to the donor's tax return. No appraisal, no deduction.

What does this all mean?

- If you want to make a property donation, it's easiest to use marketable securities.

- If you are donating other property, and you plan to take a deduction over $5,000, get the appraisal done first; if you've already made the donation, arrange the appraisal now.

- If you are donating something like artwork, make sure the donee won't be selling it within three years if you plan to claim a fair-market value donation.

Check back every business day through 12/31 for another year-end tax planning post.

Tags: year-end tax planning.