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		CHARITABLE CONTRIBUTIONS OF PROPERTY: Maximizing the Deduction
		This Financial Guide discusses the rules that apply when you contribute an asset — as opposed to money — to charity. The discussion in this Financial Guide is meant to provide general information, so that you can have a more effective tax planning discussion with your tax adviser.

TABLE OF CONTENTS

Determining Fair Market Value
Contributions Subject to Special Rules
Donating Property That Has Decreased in Value
Donating Property That Has Increased in Value
Ordinary Income Property
Capital Gain Property
Bargain Sales
Penalty
INFOSOURCES

Caution: The rules in this area are extremely complex. We urge you not to act on any transaction without seeking the proper advice.

If you contribute property to a qualified organization, the amount of your charitable contribution is generally the fair market value of the property at the time of the contribution. However, if the property fits into one of the categories discussed here, the amount of your deduction must be decreased.

After discussing how to determine the fair market value of something you donate, we’ll discuss the following categories of charitable gifts of property:

• Those subject to special rules — property subject to a debt, partial interests, future interests, and inventory;
• Property that has decreased in value;
• Property that has increased in value;
• Bargain Sales.

Related Financial Guide: See What Records You Should Keep To Substantiate Your Charitable Contributions

DETERMINING FAIR MARKET VALUE

This section discusses general guidelines for determining the fair market value of various types of donated property.

Fair market value is the price at which property would change hands between a willing buyer and a willing seller, neither having to buy or sell, and both having reasonable knowledge of all the relevant facts.

Used clothing. The fair market value of used clothing and other personal items is usually far less than their original retail price. There are no fixed formulas or methods for finding the value of items of clothing.

TIP: Claim as the value the price that buyers of used items actually pay in used clothing stores, such as consignment or thrift shops.

Household goods. The fair market value of used household goods, such as furniture, appliances, and linens, is usually much lower than the price paid when new. These items may have little or no market value because they are in a worn condition, out of style, or no longer useful. For these reasons, formulas (such as using a percentage of the cost to buy a new replacement item) are not acceptable in determining value.

You should support your valuation with photographs, canceled checks, receipts from your purchase of the items, or other evidence. Magazine or newspaper articles and photographs that describe the items and statements by the recipients of the items are also useful. (This documentation does not get filed with your return; it is kept on hand as proof.)

Note: If the property is valuable because it is old or unique, special rules apply.

Cars, boats, and aircraft. If you contribute a car, boat, or aircraft to a charitable organization, you must determine its fair market value.

Certain commercial firms and trade organizations publish guides, commonly called "blue books," containing complete dealer sale prices or dealer average prices for recent model years. The guides may be published monthly or seasonally, and for different regions of the country.

Note: A link to an online “blue book” is included in the Appendix.

These guides also provide estimates for adjusting for unusual equipment, unusual mileage, and physical condition. The prices are not "official" and these publications are not considered an appraisal of any specific donated property. But they do provide clues for making an appraisal and suggest relative prices for comparison with current sales and offerings in your area.

Note: Except for inexpensive small boats, the valuation of boats should be based on an appraisal by a marine surveyor because the physical condition is critical to the value.

Example: You donate your car to a local high school for use by students studying automobile repair. Your credit union told you that the "blue book" value of the car is $1,600. However, your car needs extensive repairs and, after some checking, you find that you could sell it for $750. You can deduct $750, the true fair market value of the car, as a charitable contribution.

Large quantities. If you contribute a large number of the same item, fair market value is the price at which comparable numbers of the item are being sold.

Example: You purchase 500 Bibles for $1,000. The person who sells them to you says the retail value of these bibles is $3,000. If you contribute the Bibles to a qualified organization, you can claim a deduction only for the price at which similar numbers of the same Bible are currently being sold. Your charitable contribution is $1,000, unless you can show that similar numbers of that Bible were selling at a different price at the time of the contribution.

CONTRIBUTIONS SUBJECT TO SPECIAL RULES

Special rules apply if you contribute:

• Property subject to a debt,
• A partial interest in property,
• A future interest in tangible personal property, or
• Inventory from your business.

These special rules are described briefly.

Property subject to a debt. If you contribute property subject to a debt (such as a mortgage), there are two possible ways your deduction might be reduced. First, special rules require you to reduce your deduction by certain interest payments you make. These rules prevent a double deduction of the same amount as both investment interest and a charitable contribution.

Second, if the debt is assumed by the recipient (or another person), you must reduce the fair market value of the property by the amount of the outstanding debt.

Note: If you sold the property to a qualified organization at a bargain price (discussed later), the amount of the debt is also treated as an amount realized on the sale or exchange of property.

Partial interest in property. Generally, you cannot deduct a charitable contribution (not made by a transfer in trust) of less than your entire interest in property. A contribution of the right to use property is a contribution of less than your entire interest in that property,and is not deductible.

There are important exceptions to this rule. You can deduct a charitable contribution of a partial interest in property if that interest fits one of the following categories:

1. A remainder interest in your personal home or farm. A remainder interest is one that passes to a beneficiary after the end of an earlier interest in the property.

Example: You keep the right to live in your home during your lifetime and give your church a remainder interest that begins upon your death.

2. An undivided part of your entire interest. This must consist of a part of every substantial interest or right you own in the property and must last as long as your interest in the property lasts.

Example: You contribute voting stock to a qualified organization but keep the right to vote the stock. The right to vote is a substantial right in the stock. You have not contributed an undivided part of your entire interest and cannot deduct your contribution.

3. A partial interest that would be deductible if transferred in trust.

4. A qualified conservation contribution (as specifically defined in the tax law).

Future interest in tangible personal property. You can deduct the value of a charitable contribution of a future interest in tangible personal property only after all intervening interests in and rights to the actual possession or enjoyment of the property have either expired or been turned over to someone other than yourself, a related person, or a related organization.

Related persons include your spouse, children, grandchildren, brothers, sisters, and parents. Related organizations may include a partnership or corporation that you have an interest in, or an estate or trust that you have a connection with.

Tangible personal property. This is any property, other than land or buildings, that can be seen or touched. It includes furniture, books, jewelry, paintings, and cars.

Future interest. This is any interest that is to begin at some future time, regardless of whether it is designated as a future interest under state law.

Example: You own an antique car that you contribute to a museum. You give up ownership, but retain the right to keep the car in your garage with your personal collection. Since you keep an interest in the property, you cannot deduct the contribution. If you turn the car over to the museum in a later year, giving up all rights to its use, possession, and enjoyment, you can take a deduction for the contribution in that later year.

Inventory. If you contribute inventory (property that you sell in the course of your business), the amount you can claim as a contribution deduction is the smaller of its fair market value on the day you contributed it or its basis. The basis of donated inventory is any cost incurred for the inventory in an earlier year that you would otherwise include in your opening inventory for the year of the contribution. You must remove the amount of your contribution deduction from your opening inventory. It is not part of the cost of goods sold.

If the cost of donated inventory is not included in your opening inventory, the inventory's basis is zero and you cannot claim a charitable contribution deduction. Treat the inventory's cost as you would ordinarily treat it under your method of accounting. For example, include the purchase price of inventory bought and donated in the same year in the cost of goods sold for that year.

DONATING PROPERTY THAT HAS DECREASED IN VALUE

If you contribute property with a fair market value that is less than your basis in it (generally, less than what you paid for it), your deduction is limited to its fair market value. You cannot claim a deduction for the difference between the property's basis and its fair market value.

Common examples of property that decreases in value include clothing, furniture, appliances, and cars.

DONATING PROPERTY THAT HAS INCREASED IN VALUE

If you contribute property with a fair market value that is more than your basis in it, you may have to reduce the fair market value by the amount of appreciation (increase in value) when you figure your deduction.

Again, your basis in property is generally what you paid for it. Different rules apply to figuring your deduction, depending on whether the property is:

1. Ordinary income property, or

2. Capital gain property.

ORDINARY INCOME PROPERTY

Property is ordinary income property if its sale at fair market value on the date it was contributed would have resulted in ordinary income or in short-term capital gain. Examples of ordinary income property are inventory, works of art created by the donor, manuscripts prepared by the donor, and capital assets held 1 year or less.

Equipment or other property used in a trade or business is considered ordinary income property to the extent of any gain that would have been treated as ordinary income under the tax law, had the property been sold at its fair market value at the time of contribution.

Amount of deduction. The amount you can deduct for a contribution of ordinary income property is its fair market value less the amount that would be ordinary income or short-term capital gain if you sold the property for its fair market value. Generally, this rule limits the deduction to your basis in the property.

Example: You donate stock that you held for 5 months to your church. The fair market value of the stock on the day you donate it is $1,000, but you paid only $800 (your basis). Because the $200 of appreciation would be short-term capital gain if you sold the stock, your deduction is limited to $800 (fair market value less the appreciation).

Exception. Do not reduce your charitable contribution if you include the ordinary or capital gain income in your gross income in the same year as the contribution.

CAPITAL GAIN PROPERTY

Property is capital gain property if its sale at fair market value on the date of the contribution would have resulted in long-term capital gain. Capital gain property includes capital assets held more than 1 year.

Capital assets. Capital assets include most items of property that you own and use for personal purposes or investment. Examples of capital assets are stocks, bonds, jewelry, coin or stamp collections, and cars or furniture used for personal purposes.

For purposes of figuring your charitable contribution, capital assets also include certain real property and depreciable property used in your trade or business and, generally, held more than 1 year.

Real property. Real property is land and generally anything that is built on, growing on, or attached to land.

Depreciable property. Depreciable property is property used in business or held for the production of income and for which a depreciation deduction is allowed.

Amount of deduction — general rule. When figuring your deduction for a gift of capital gain property, you usually can use the fair market value of the gift.

However, in certain situations, you must reduce the fair market value by any amount that would have been long-term capital gain if you had sold the property for its fair market value. Generally, this means reducing the fair market value to the property's cost or other basis. We will not go into these complex rules in this Financial Guide.

Ordinary or capital gain income included in gross income. You do not reduce your charitable contribution if you include the ordinary or capital gain income in your gross income in the same year as the contribution. This may happen when you transfer installment or discount obligations or when you assign income to a charitable organization.

Example: You donate an installment note to a qualified organization. The note has a fair market value of $10,000 and a basis to you of $7,000. As a result of the donation, you have a short-term capital gain of $3,000 ($10,000 - $7,000), which you include in your income for the year. Your charitable contribution is $10,000.

BARGAIN SALES

A bargain sale of property to a qualified organization (a sale or exchange for less than the property's fair market value) is partly a charitable contribution and partly a sale or exchange.

The part of the bargain sale that is a sale or exchange may result in a taxable gain.

PENALTY

The IRS may impose a penalty if you overstate the value or adjusted basis of donated property.

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