AntiquesCharitable Gifts of Tangible Personal Property
An art owner donates some paintings to the city's art museum. A car dealer gives a van to the local homeless shelter. An antique collector presents a valuable vase to his alma mater. What do all three of these donations have in common? All three donations are gifts of tangible personal property.
A donation of tangible personal property can provide unique benefits to a charitable organization which could not be realized from any other asset. However, the donor should be aware of special tax rules that may affect a proposed gift.
Tangible Personal Property Defined
Tangible personal property is defined as property that can be physically touched, excluding land and improvements (buildings and permanent structures). Examples of tangible personal property include:
Antiques
Artwork
Precious gems and metals
Stamp and coin collections
Motor vehicles.
In contrast, intangible personal property is untouchable property, which may be evidenced by a physical piece of paper, i.e. a stock certificate or a promissory note. The physical paper merely signifies the ownership and value of the intangible property.
Most assets fall easily into one of the two categories. However, it is not as easy to determine the value of coin or currency with both a monetary and numismatic value. In tax law contexts other than the charitable deduction, such items have been viewed as tangible personal property.
When an individual sells tangible personal property, he or she may incur the capital gains tax, which is a tax imposed on the gain from the sale of capital assets. The Internal Revenue Code defines capital assets by exception. A capital asset is everything except assets that produce ordinary income or loss when sold. Ordinary income assets include the following, among other things:
Inventory
Property used in a trade or business
Copyright, or a literary, artistic or musical composition (when held by the creator);
Accounts receivable
A U.S. government publication
Supplies which are used or consumed by the taxpayer in the ordinary course of a trade or business.
When an individual sells tangible personal property for a price greater than the asset's adjusted basis, a capital gain has occurred unless the person fits into one of the preceding categories. Capital gains may be long-term or short-term. A long-term capital gain occurs when a capital asset is sold that has been held by the donor for over one year. A short-term capital gain occurs when a capital asset is sold that has been held for one year or less.
Long-term capital gains can be taxed at a maximum rate of 20% in 2026. However, long-term capital gains on "collectibles," i.e., certain kinds of appreciated tangible personal property, are subject to a top tax rate of 28%. Although the imposition of a higher long-term capital gains tax rate is a disadvantage to the donor, more capital gains tax may be avoided by donating the tangible personal property to a charitable organization, as opposed to a comparable appreciated asset subject to a 20% top rate on long-term capital gain.
Click here for an example of the capital gains tax savings.
Consider a donor who is holding two long-term appreciated assets, XYZ stock and a collectible, tangible personal property item, each with a basis of $15,000 and each currently valued at $50,000.
| XYZ Stock | Collectible | |
|---|---|---|
| Fair Market Value | $50,000 | $50,000 |
| Cost Basis | $15,000 | $15,000 |
| Net Long Term Capital Gains | $35,000 | $35,000 |
| Capital Gains Tax | $ 7,000 (20%) | $ 9,800 (28%) |
By giving the tangible personal property to charity rather than the XYZ stock, the donor could save $2,800 of capital gain tax when the retained asset is ultimately sold.
Ordinary Income Reduction Rules
Normally, a donor who gives long-term tangible personal property to a qualified charitable organization will take a charitable deduction to the extent of its fair market value defined as:
"amount at which property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell, and both having reasonable knowledge of the relevant facts."
Ordinary Income Reduction Rules
However, the amount of the deduction may be diminished by the ordinary income-reduction rules. The rules reduce the deemed amount of the contribution by any gain that would have been classified as ordinary income, or short-term capital gain if the property had been sold for its fair market value at the date of the gift. Assets that would fall into one of these two categories include:
Appreciated property held for sale in the ordinary course of the donor's trade or business (e.g. a manufacturer's inventory, a dealer's stock-in-trade, artwork or a manuscript created by the donor)
Appreciated property subject to recapture (e.g. IRC Sec. 1245 property)
Appreciated short-term capital assets
Certain kinds of appreciated stock, the gain on which would not be long-term capital gain if the stock were sold
Let's look at an example of the ordinary income reduction rules:
Amy, an art dealer, gives one of the paintings from her gallery to the local art museum. She purchased the painting in 2002 for $10,000. Due to the emerging popularity of the artist, at the time of the donation the painting was worth $40,000. Amy had an adjusted gross income (AGI) of $200,000 in the year of her donation.
What is the value of her deduction? The ordinary-income reduction rules would apply to this situation, because the donation is a gift of appreciated ordinary income property (inventory). Therefore, Amy would take the fair market value of $40,000 minus the amount of ordinary income which would have been realized on a sale of the painting, or $30,000. Amy would be allowed a $10,000 deduction on the art donation, assuming she meets all other applicable limitations.
Exceptions To General Valuation Rules
Two exceptions exist to this general valuation rule, with both exceptions only applying to corporate donors:
Inventory—A corporate donor who gives inventory to a public charity can take a deduction for the fair market value of the contribution reduced by one-half of the amount that would have been ordinary income upon a sale if the inventory is used for the care of the ill, needy or infants. The corporation's deduction will be limited to the property's tax basis plus one-half of appreciation up to a limit of twice the property's basis.
Note: Some donors have sought to avoid the deductibility limits on gifts of inventory. Here is what they've done: The donors bought property in bulk, held the property for a long-term holding period, and then donated the items over time to qualified charities. Upon the sale, the donor then claims a deduction based on the single-quantity value on each item.
The IRS put a stop to this practice, finding that although these items are not "inventory" in a conventional sense, the donor is engaged in "the substantial equivalent to activities of a dealer selling property in the ordinary course of a trade or business." Therefore, the donor must apply the ordinary-income reduction rules.
Click here for an IRS ruling on hobby vs. inventory.
Simon raised plants as a hobby. Over time he donated these plants to a number of qualified charities. While Simon technically was not "in the business" of raising and selling plants, the IRS viewed the activities as equivalent to those of a commercial nursery. The plants were comparable to inventory held for sale. Therefore, Simon's charitable deduction was reduced by the ordinary income he would have realized on a sale of plants.
Scientific Research Equipment—A corporate donor who contributes newly manufactured scientific equipment to a college, university or scientific research organization for use in research, experimentation or research training may claim an income tax charitable deduction equal to its tax basis plus one-half of the appreciation in the property. The maximum deduction a corporate donor may claim is twice the basis in the property.
There is a limit to the amount of the contribution for a charitable gift of a motor vehicle to the amount actually received by the charitable donee upon a subsequent sale of the vehicle when there is no "significant intervening use" or "material improvement" by the charity, or when the charity does not give the donated vehicle to certain "needy individuals." An example of significant intervening use (prior to a later sale) is the charity's use of a donated vehicle to deliver meals every day for a year in the ordinary course of its operations [IRS Notice 2005-44, Sec. 7.01]. A material improvement is a major repair, or perhaps the restoration of a classic car, in a way that dramatically increases its value. Minor repairs, cleaning, maintenance, etc., are not considered "material improvements."
The IRS has issued explicit guidelines as to the proper valuation of charitable gifts of motor vehicles:
The IRS warns that fair market value is not necessarily what is reported in a used car guide and may be substantially less than the "blue book value" (to cite one commonly used car guide). Dealer retail value cannot be used [IRS Notice 2005-44, Sec. 5].
The IRS requires all donors to obtain a contemporaneous written acknowledgement from the charity if the total deduction claimed for a donated car is greater than $250. The acknowledgment must assess whether goods or services were provided by the charity in return for the contribution, and, if so, a good faith estimate of the value of those goods and services.
The IRS requires the taxpayer to complete Section A of Form 8283 if the total deduction claimed for a donated car is greater than $500. Form 8283 requests information concerning donated property. If the total deduction claimed for a donated car is greater than $5,000, the IRS requires the taxpayers to complete Section B of Form 8283, including signature/verification by the taxpayer, the appraiser and the charitable organization. If the taxpayer, appraiser and charity complete Section B of Form 8283 and the charity sells or otherwise disposes of the car within two years after the date of receipt, the charity must file Form 8282 and provide a copy to the donor.
These rules also apply to donations of boats and planes.
An important question is whether the donated tangible personal property can be used for a related or unrelated use because the characterization determines the donor's allowable deduction. A related use of property furthers a charitable organization's exempt purposes.
Donors frequently have trouble determining whether a donation will be related to the charitable organization's exempt purposes. Their quandary is partially fueled by the unpredictability of how a charity may actually use the tangible personal property, and how the IRS may view such use.
Click here for four rulings or cases on the related-use rule.
The IRS ruled etchings of wildlife donated to a state and displayed to the public in state office buildings qualified as a related use.
The donation of a stamp collection to a university was ruled a related use when the collection was displayed in the university's art gallery and was used by the university's art students.
The donation of porcelain art objects to a not-for-profit retirement home was ruled a related use because the donated objects improved the quality of the residents' living environment.
The donation of a horse to a cancer charity could not be "stretched" into a related use, and the Tax Court reduced the donor's deduction by the appreciation in value of the horse.
Deduction for Tangible Personal Property Put to Unrelated Use
If the tangible personal property is unrelated to the charity's exempt purposes, the deduction must be reduced by the amount of gain that would have been long-term capital gain had the property been sold at its fair market value on the date of the gift.
Let's look at an example of the effects of unrelated use on a donor's charitable tax deduction.
The donor purchased a painting several years ago for $30,000. According to the donor's qualified appraisal, the painting is currently worth $70,000. The donor plans to donate the painting to a social services charity that provides in-home counseling services to poor, neglected and abused children. Because the painting is unrelated to the charity's exempt purpose, the donor's deduction would be limited to $30,000—the $70,000 fair market value less the gain that would have been long-term capital gain if the painting had been sold.
If the donor decides instead to donate the painting to an art museum that plans to display the painting, the use would then be "related," and the donor would be entitled to a $70,000 deduction for the full fair market value. It's not the "worthiness" of the charitable cause that qualifies the tangible personal property for a full deduction, but the tangible personal property's relation to the charity's exempt purpose.
Click here for limitations on the charitable income tax deduction.
Deduction amounts are limited in the following ways:
Only donation amounts that surpass 0.5% of a donor's adjusted gross income qualify for a charitable deduction.
Donors in the 37% tax bracket have the tax benefit of their deduction limited to 35%.
Burden In Determining Related Use
The burden of determining whether the charity will put tangible personal property to a related or unrelated use lies on the donor. A donor is advised to treat the tangible personal property as being put to a related use, if:
The donor determines that the charity has not in fact put the tangible personal property to an unrelated use, or
At the time of the gift, the donor could reasonably anticipate that the property would not be put to an unrelated use by the charitable donee.
A donor who is concerned about the relatedness of the gift should obtain written confirmation of a charity's intended use of the property in advance of making a tangible personal property gift.
Click here for an example of the adverse consequence to a donor who did not receive a written confirmation on the relatedness of a donation.
The donor gave an antique car to a university and claimed a charitable deduction equal to the auto's fair market value. The donor failed to establish: (1) that the auto was actually being used by the university for related purposes, or (2) that it was reasonable to anticipate such related use at the time of the gift—especially when the university offered no curriculum dealing with antique cars or their restoration. Therefore, the donor's deduction was reduced by the built-in, long-term capital gain.
Click here for an example of a charitable organization's letter acknowledging receipt of gift and related use.
(Name of charity) acknowledges receipt of your generous gift of (describe the tangible personal property contributed) on (date of gift). We will take the necessary and appropriate steps to protect, preserve and insure this property.
This property relates to our charitable purposes, and we intend to retain and display (or use) the property in (specify location, e.g. university hall, museum room, etc.). (More details on planned use may be provided).
Recapture of Tax Benefit When Property Not Used for an Exempt Use
As noted, a donor may claim the fair market value for gifts of tangible personal property when the donee organization will use such gifts for its tax-exempt purpose. In the event that a donee organization disposes with the property within three years of the contribution of the property, the donor is subject to an adjustment of the tax benefit according to the following schedule:
If the charity disposes of the property in the same tax year the gift is made, the donor’s deduction is the basis.
If the charity disposes of the property in year two or three after the contribution, the donor must include as ordinary income for its taxable year in which the disposition occurs an amount equal to the excess (if any) of the amount of the deduction over the donor’s basis in the property at the time of the contribution.
There is an exception if the donee organization certifies in a written statement either that the property had a related use function and was actually used in that capacity before its sale, or that the intended use of the property at the time of contribution became impossible or infeasible to implement after such gift. The donor should, also, receive a copy of this certification.
The Internal Revenue Service treats the relatedness of gifts to museums differently. A donor giving property to a museum probably has no way of knowing whether the museum will decide to exhibit or sell a donated art object.
If the donated property is of the type usually retained by the museum for display, then the donor may reasonably anticipate that the tangible personal property will be put to a related use. If the museum should eventually sell the object, this will not retroactively affect the donor's deduction, assuming the donor had no foreknowledge
However, if the donor has actual knowledge that the donated tangible personal property will be sold (or exchanged) rather than exhibited, then the donor may not claim a deduction based on related-use.
The Internal Revenue Service also includes a special exception for charity auctions. Frequently, charitable organizations auction off tangible personal property items donated by individuals and businesses.
Although the proceeds of the auction support the charity's exempt purposes, the charity's use of the donated tangible personal property for fund-raising purposes is unrelated to its exempt purposes. Therefore, the donor's charitable deduction must be reduced by the amount of gain that would have been long-term capital gain if the tangible personal property had been sold for its fair market value.
If the fair market value of the tangible personal property is less than the donor's tax basis, the related-use rule will have no practical effect. This is often the case with donated computers and other equipment that has been surpassed by later technology.
The estate tax charitable deduction is not subject to the related-use rule. Therefore, a testamentary bequest of a tangible personal property is valued at its fair market value without regard to charity's use of the property.
To claim an income tax charitable deduction at the time of the gift of tangible personal property, the gift must be of a present interest. In this case, an income tax charitable deduction may be allowed if all the intervening rights have expired or passed to a person other than the donor or someone closely related to the donor.
Restrictions on the deductibility of future interests in tangible personal property are not found under federal gift and estate tax rules.
Click here for an example of a gift of a future interest in tangible personal property.
Terry donates a valuable painting to the local art museum. However, Terry wants to enjoy and possess the painting during life, with the remainder going to charity. Did Terry's donation qualify for the income tax charitable deduction? Terry's donation fails to qualify for the deduction because the charitable gift is a future interest gift of tangible personal property.
Although the gift tax and estate tax charitable deductions are not subject to the same restrictions on future interest gifts as the income tax charitable deduction, some conditions for the donor to receive the deduction do apply. A partial-interest gift or bequest generally must be in the form of a CRT or a pooled income fund to qualify for a charitable deduction under gift or estate tax rules.
Generally, funding a CRT with a tangible personal property interest is only appropriate when the trustee has the discretion to sell the property and reinvest the proceeds. A CRT may still run into future-interest problems depending on whether the trust is testamentary or inter vivos.
Testamentary CRT—A testamentary CRT (a CRT derived from a will) which is funded with tangible personal property does not run into future interest problems.
Inter vivos CRT—An inter vivos CRT (a CRT formed when the donor is living) which is funded with tangible personal property runs into federal income tax problems because of the future interest gift in tangible personal property. The future charitable interest prevents the donor from claiming an income tax charitable deduction immediately. The income tax charitable deduction is deferred until the intervening interest of the donor or any family members have expired.
A charitable gift annuity may be funded by tangible personal property, providing there is no prohibition under state law or the charity's gift acceptance policy. Under federal tax law, the gift annuity is viewed as a present-interest gift of the gift portion of the transaction. Therefore, the future interest rule would not be tripped if tangible personal property were transferred to a charity in exchange for the gift annuity.
As a general rule, the charitable deduction will be denied for gifts of a partial interest. However, the tax code builds in certain exceptions to this rule. For example, if the gift is of an "undivided portion of a taxpayer's entire interest in property" then the charitable deduction will be received. The charity's interest must:
Consist of a portion of each and every substantial right or interest owned by the donor
The interest must extend over the entire period of the donor's interest
Although a donor cannot deduct currently a gift of a future interest, he may "time-share" tangible personal property with a charity and secure a current charitable deduction. For example, a donor may donate to a university the right to exhibit a painting for that portion of the year which coincides with the academic year, and reserve the right to possess and enjoy the painting during the balance of the year. Charity's right to possess and display the painting during a defined portion of the year generates a charitable deduction for the donor.
However, the donor must contribute all of the donor's remaining interest in such property to the same donee before the earlier of 10 years from the initial fractional contribution or the donor's death. If this requirement is not met, the charitable income and gift tax deductions for all prior contributions of interests in the item shall be recaptured (plus interest). The same penalty applies in the event that the donee organization fails to either (i) take substantial physical possession of the item, or (ii) put the item towards a related use, during the same 10 years.
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