Why does it matter what type of property is donated to charity?
You can donate many different types of property to charity. The amount of your charitable deduction for income tax purposes depends partly on the type of property you donate. The general rule is that your charitable deduction is limited to either 30 percent or 50 percent of your contribution base (your contribution base is generally equal to your adjusted gross income), depending on the type of property you donate and the classification of the charity as a public charity or a private foundation (although lower limitations may apply to contributions of capital gain property). (For 2018 to 2025, the 50 percent limit is increased to 60 percent for certain cash gifts.) Any amount that cannot be deducted in the current year can be carried over and deducted for up to five succeeding years (the carryover rule), assuming you continue to itemize deductions.
What are the different types of property that can be donated to charity?
There are six general categories of property you can donate to charity:
- Long-term capital gain property
- Ordinary income property
- Tangible personal property, where the charity’s use of that property is related to the functions of the charity
- Tangible personal property, where the charity’s use of that property is unrelated to the functions of the charity
- Future interests in property
This is the easiest item to donate to charity. If your charity is a public one, your deduction is limited to 50 percent of your contribution base. For 2018 to 2025, the 50 percent limit is increased to 60 percent for certain cash gifts. The value of your gift is simply the amount of cash donated. The carryover rule applies so that any amount that cannot be deducted in the current year can be carried over and deducted for up to five succeeding years.
Long-term capital gain property
Long-term capital gain property is property that would have produced a long-term capital gain if it had been sold rather than donated to charity. Remember, a gift to charity is not the same as a sale to charity. Capital gain is considered “long term capital gain” when property to which it applies has been held longer than 12 months.
There are two types of long-term capital gain property:
- Intangible personal property and real property, such as stock or land
- Tangible personal property, such as a car, sculpture or jewelry
When you donate intangible long-term capital gain property to a public charity, your deduction is limited to 30 percent of your contribution base. The carryover rule applies. The full fair market value (FMV) of the asset is used to determine your charitable deduction.
Ordinary income property
Ordinary income property is property that would have generated ordinary income (rather than capital gain) if the asset had been sold rather than donated to charity. Ordinary income property includes:
- Property held less than the requisite long-term period
- Section 306 stock (stock acquired in a nontaxable corporate transaction) any gain recognized upon the sale of Section 306 is treated as ordinary income
- Works of art, books, letters, and musical compositions, but only if given by the person who created them or for whom they were prepared
If you donate ordinary income property to a public charity, your deduction is limited to 50 percent of your contribution base. However, the tax code does not allow you to deduct the full FMV of such a gift. Instead, your deduction is generally limited to your actual cost for the property, plus any adjustments such as improvements or depreciation. This figure is commonly referred to as your basis in the property.
Tangible personal property
Tangible personal property includes items such as cars, paintings, and jewelry. The IRS makes a distinction between gifts that will be used by the charity in a manner related to the charity’s functions and gifts that will not be used in a manner related to the charity’s functions.
The rule is if the donated property is related to the charity’s functions, then your deduction is the fair market value of the property, limited to 30 percent of your contribution base. However, if the donated property is unrelated to the charity’s functions, your deduction is your basis (cost) in the property, limited to 30 percent of your contribution base. The carryover rule applies in both situations.
Future interests in property
A future interest is one that will vest in possession or enjoyment at some time in the future.
The general rule of charitable gifts is that the gift must actually be paid to the charity in cash or other property before the close of the tax year in order for the donor to be entitled to a charitable deduction for that property in that year. Therefore, a transfer to a charity of a future interest in property is not deductible until the charity has a free and clear right to possess and enjoy the property. The exception to this rule is when the gift of the future interest is in the form of a future interest in trust. Here, the future interest is tax-deductible when the gift is made even though the charity may not enjoy the gift for several years. The tax laws permit several types of trusts to be used for the purpose of making charitable gifts of future interests, including charitable remainder annuity trusts (CRATs), charitable remainder unitrusts (CRUTs), pooled income funds, and charitable lead trusts. If you comply with the requirements for formation of these trusts as set forth in the Internal Revenue Code and corresponding regulations, you can receive income, estate, and gift tax benefits.