Taxpayers often consider making noncash charitable gifts part of their tax and wealth strategies. Sometimes this is driven by their favorite charity’s need for a specific item to be donated. Other times it is driven by the need to dispose of a problematic asset and, occasionally, it provides a tax-advantaged mechanism for transfer of appreciated art and collectables.
When properly planned, orchestrated and reported, a donor may receive a charitable deduction equal to the full fair-market value of the donated property (subject to AGI limitations beyond the scope of this article). In addition, a donor may be able to eliminate capital gains tax on appreciated property.
Whatever the motive, there are several potential hazards that may imperil the desired tax benefits for donors who do not properly execute and report the transaction. Thus, compliance with specific requirements in the U.S. tax code is critical and the following steps should be considered.
Furthering a charity’s purpose
The first potential hazard arises when a donor does not choose a proper recipient charitable organization to receive a donation of tangible personal property. If a recipient does not put the donated property to use related to its tax-exempt purpose or function, a donor may still be entitled to a tax deduction for the gift. In this circumstance, the donor will be required to reduce his or her charitable deduction by the amount of long-term capital gain that would have been recognized if the property had been sold by the donor. In other words, the donor’s charitable deduction will be limited to that donor’s basis in the donated property if the recipient cannot or does not put the property to use in achieving its charitable purpose. To avoid this potential hazard, a donor should confirm that a recipient charitable organization can and will put the property to use in furtherance of its charitable purpose.
Ensure three-year use of donated property
The second potential hazard comes into play if a recipient charitable organization sells or otherwise disposes of the donated tangible personal property within three years of the date of the gift. If the charitable organization disposes of the donated property in the year donated, the donor’s allowable charitable deduction is reduced to his or her basis in the property. If the charitable organization disposes of the donated property after the year donated, but within three years of the donation, the donor may be required to include in his or her taxable income in the year of disposal a recapture amount. The amount to be recaptured is equal to the amount by which the original charitable deduction exceeded his or her basis in the property.
The tax code provides an exception to both of these provisions if an officer of the recipient charitable organization provides a written certification signed under penalty of perjury that either (1) describes how the property was put to use by the recipient charitable organization prior to the sale and how such use furthered the organizations purpose or function, or (2) states the intended use of the property by the recipient organization at the time of the contribution and certifies that such intended use became impossible or infeasible to implement.
As with the first potential hazard, the key to minimizing risk in this area is vetting a recipient charitable organization. In addition to researching the suitability of a recipient charitable organization, direct conversations with the organization should be undertaken prior to the gift. These discussions are helpful to the taxpayer and should be expected by any well-run recipient charitable organization.
As part of these discussions for significant gifts, the terms of a gift are often memorialized in a gift agreement. Topics for discussion in this process should include: (1) how soon the recipient organization will put the donated property to use in achieving its charitable purpose; (2) what the likelihood is of disposing of the property within three years of the gift; (3) what circumstances might cause the organization to change its planned use; and (4) which officer of the organization would provide the certification statement if the property were disposed of within three years of the gift.
Obtain a qualified appraisal
The third hazard arises when donors fail to obtain a qualified appraisal. A deduction of a noncash contribution of $5,000 or more generally requires a donor to obtain a “qualified appraisal” of the donated property. To be a qualified appraisal, the appraisal must be prepared, signed and dated by a qualified appraiser; include a sufficiently detailed description of the property such that a person unfamiliar with the type of property could identify the property; and cannot be completed more than 60 days prior to the date of contribution of the appraised property.
In addition, an appraiser must have experience and knowledge of the type of property being appraised. Finally, to be a qualified appraisal, the appraisal fee cannot be based on a percentage of the value appraised. One important exception to this rule -- publicly traded securities may be contributed and a qualified appraisal is not required for them.
File a complete and accurate Form 8283 with the IRS
The fourth hazard for donors is failing to complete and file Form 8283, which reports certain information required in connection with noncash contributions. Some donors have attached the appraisal or schedules which includes the required information in lieu of completing the appraisal summary on Form 8283. However, several tax court decisions issued recently have held that those source documents are not permissible substitutes for a completed Form 8283. As a result, the case law has made it clear that there is no substitute for fully and accurately completing all the applicable sections on Form 8283.
The regulations also require a summary of the qualified appraisal. Form 8283 has a section that functions as this appraisal summary. The form must include the name, address and identifying number of the qualified appraiser. The summary must also contain the appraised fair market value of the property on the date of contribution and a declaration by the appraiser that is signed and dated by the donee and the qualified appraiser. Depending on the type of donated property and value, the donor may have additional requirements such as attaching a photograph of the property or including a copy of the appraisal. Additionally, in some circumstances the gift may need to be included on the taxpayer’s gift tax return for the year of the gift.
Achieving favorable tax benefits
Noncash charitable gifts can have favorable tax benefits. However, to take advantage of the tax benefits, donors must be careful in planning, executing and reporting the transaction. In planning the transaction, donors should ensure they have chosen a donee organization that will use a donated property in furtherance of its charitable purpose and that the donee intends to hold the property for at least three years. In execution of the gift, the donated property must be appraised by a qualified appraisal if the value is $5,000 or more. And finally, in reporting, donors must file a complete Form 8283, including detailed information about the property, an appraisal summary and signatures by the appraiser and donee.
By following these steps and avoiding common errors, donors may achieve the dual benefits of deducting the property’s full fair market value and eliminating tax on the property’s appreciation.
Aaron Borden leads Grant Thornton’s Private Wealth Services practice in Dallas. Aaron has 20 years of experience finding solutions to complex tax problems for entrepreneurs, business owners, and family offices.
- Private Wealth Services
Brad Roe leads the Private Wealth Services practice in the Houston office. Roe has more than 28 years of professional experience working with high net worth individuals and families, closely held businesses, trusts and estates.
- Private Wealth Services
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