Donating appreciated property to charity can produce substantial tax savings. Appreciated property might include art, antiques, real estate, and stock. It does not include ordinary income property, such as inventory or a work of art you created. Generally, to take full advantage of this tax benefit, you must have owned the property more than one year before you give it away.
Giving appreciated property to charity is better than selling the property and donating the sales proceeds.
| You own art worth $2,000. You bought the art five years ago for $500. If you sell the art and donate the proceeds from the sale, you get these results:
Contribution of cash after the sale $2,000
Taxable gain ($2,000 - $500) $1,500
Tax cost $(420)
Net tax savings $140
By selling the property and contributing the proceeds to charity, you receive a $2,000 tax deduction for the cash contribution. However, you are taxed on the $1,500 gain from the sale. Thus, your net tax savings is only $140. |
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If, instead, you donate the art directly to the charity, you will receive a tax deduction for the full fair market value of the art.
Contribution $2,000
Taxable gain $0
Net tax savings $560
The tax savings are significantly better when you contribute the art directly to the charity because you avoid the tax on the gain from the sale. |
Do not give depreciated property to charity
Giving property that has gone down in value to charity is a bad idea. You cannot deduct the loss. You are better off selling the property and donating the proceeds from the sale to the charity. This allows you to donate the same amount to the charity, deduct the charitable contribution, and also recognize a loss on your tax return, as long as the item is either business or investment property such as stock.
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You bought stock two years ago for $10,000. It is now worth $7,000. You are in the 28% tax rate bracket. If you give the stock to charity, you can only deduct $7,000. Your tax savings is $1,960 ($7,000 x 28%).
However, if you sell the stock for $7,000, you can deduct the $7,000 proceeds you give the charity and you can recognize a loss of $3,000 ($7,000 sales price less $10,000 cost). Your tax savings from the donation is still $1,960 ($7,000 x 28%). However, you also have the tax savings of $840 ($3,000 x 28%) from deducting the loss. |
Julie Welch (Runtz), CPA, CFP, and Randy Gardner, LLM, CPA, CFP, are the authors of 101 Tax-Saving Ideas, 10th edition.
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