Gifts of Appreciation Assets
By Mr. Saghir Aslam
Irvine , CA
(The following information is provided solely to educate the Muslim community about investing and financial planning. It is hoped that the ummah will benefit from this effort through greater financial empowerment, enabling the community to live in security and dignity and fulfill their religious and moral obligations towards charitable activities)
Making gifts of appreciated property is an extremely attractive proposition for many donors. In many instances, the donor can deduct the full fair market value of his or her gift if the charity uses the property or securities in a way related to its exempt purpose. The result is that the donor may avoid paying any capital gains tax on the appreciation of the gifted property or securities.
For nonprofit organizations, though, noncash gifts can sometimes be a double-edged sword. While your organization welcomes these gifts, noncash donations required more record keeping than cash gifts and are open to greater scrutiny by the Internal Revenue Service (IRS). You should check with your accountant before donating any of the appreciated assets. It is important for a donor and recipient both to check with the proper professionals. Let’s take a look at some of the more common types of noncash donations and their tax treatments.
Ordinary Income Property
Ordinary income property is property that would produce gain other than long-term capital gain if it were sold by the door instead of contributed to charity. Business inventory is one example of ordinary income property. Works of art created by the donor or manuscripts created by the donor and capital assets the donor has owned for a year or less are other examples.
A donor’s deduction for a gift of ordinary income property generally is limited to the donor’s basis in the property-the amount paid to acquire or produce the property. In the case of business property, the deduction generally would be reduced by the profit the donor could have made if the item has been sold during the normal course of business. Additional limits apply to property donations made by a regular “C” corporation.
Tangible Personal Property
To receive full tax benefits for gifts of tangible personal property, donors should make their gifts with the nonprofit organization’s exempt purpose in mind. If the donated property is used by the nonprofit to further its stated charitable purpose, the donor generally can claim a deduction for the property’s current full fair market value. Otherwise, the deduction is limited to the donor’s basis in the property.
The tax treatment of gifts of real estate depends on whether the property is unencumbered or encumbered real estate. Essentially, a gift of unencumbered real estate is treated like any other gift of appreciated property; the gift is considered complete when the title to the property is transferred to the charitable organization.
Gifts of property encumbered by a mortgage or other debt are more complicated. The gift generally will be treated as both a sale and a gift, which will reduce the amount of the donor’s charitable deduction and generate capital gain taxable to the donor. You should consult your legal and tax advisors before contemplating any significant charitable gift, but professional advice is imperative for gifts of real estate. For an investment property, recapture of accelerated depreciation is a concern and should also be reviewed by your legal and tax advisors. Additionally, for most gifts described in this article, the donor will need a qualified appraisal to validate their income tax charitable deduction. Getting an appraisal and consulting with your professionals before donating is a must
(Saghir A. Aslam only explains strategies and formulas that he has been using. He is merely providing information, and NO ADVICE is given. Mr. Aslam does not endorse or recommend any broker, brokerage firm, or any investment at all, or does he suggest that anyone will earn a profit when or if they purchase stocks, bonds or any other investments. All stocks or investment vehicles mentioned are for illustrative purposes only. Mr. Aslam is not an attorney, accountant, real estate broker, stockbroker, investment advisor, or certified financial planner. Mr. Aslam does not have anything for sale.)