What You Need to Know About Tax Deductions for Donating Art and Personal Property

Woman With Paintings Considering Tax Deductions for Donating Art

If you are a lover of art or other fine collectibles, you probably want your collections to go to someone who will appreciate them as you do. You may also want to use your valuable collections to benefit a charitable organization that is important to you.  Donating art and personal property can benefit both your finances and a charity that you support, while ensuring that your art collection will remain in the hands of someone who understands its worth. There are things you should know about tax deductions for donating art and personal property when making your estate plan.

You may make regular charitable donations, both cash and in-kind, and take those donations as deductions on your regular income tax return. However, donations of art and valuable personal property is a bit more complex from a tax standpoint. If you plan to make such donations, it is advisable to consult with an estate planning attorney who is experienced in tax matters and large charitable donations.

Tax Considerations When Donating Art and Personal Property

Your first step, obviously, will be to decide which items you want to donate. You should have the items valued by a professional appraiser for tax purposes. Next, you will want to determine whether there are any charitable donation limitations that apply to your situation. This is a complex question beyond the scope of this blog post, and should be addressed with your accountant. However, we can identify some issues of which you and your tax professional should be aware.

One issue is whether the assets you are looking to donate are considered capital gain property or ordinary income property.  Per the Internal Revenue Code, capital gain property is a "capital asset, the sale of which at its fair market value at the time of contribution" would have yielded a long-term capital gain.  Such property can usually be deducted at its fair market value (FMV) at the time it was donated. In contrast, donations of ordinary income property must be reduced by the amount of income that would have been received had the donor sold the property for its FMV. In other words, the amount of deduction the donor can claim is limited to his or her cost basis in the property.

The legal status of the organization to which the donation of art or personal property is being made is also an important consideration. The organization's status as a private operating foundation, private non-operating foundation, or public charity can limit the amount of the donor's deduction. The deduction could be limited to anywhere from 20-50% of the donor's "contribution base." The contribution base is equal to the taxpayer's adjusted gross income (AGI) less net operating loss carrybacks.

Yet another consideration is the use to which the organization will put the donation: the so-called "related use" requirement. Let's assume you are donating a piece of artwork worth $20,000, for which you paid $5,000. If you are donating the artwork to a museum for display, that is considered a use related to the purpose of the organization. If the artwork is donated to the museum to be auctioned off to raise funds for the organization, the donor's tax deduction will be limited to his or her cost basis in the asset—in this case, $5,000. If the asset is being donated for a related use, there is no such limitation.

Some items of art may be very difficult to value accurately. In order to be certain before filing a return that the Internal Revenue Service will accept their assessment of an item's value, a donor may wish to consider obtaining a Statement of Value from the IRS for items appraised to be in excess of $50,000.  The request for a Statement of Value must include a filing fee covering up to three items (with an additional fee for additional items) and must include the taxpayer's qualified appraisal of the item. Much like a private letter ruling, a donor can rely on an IRS Statement of Value issued to them when preparing their tax return.

Planning for a Deduction for a Donation of Art

In order to ensure that the taxpayer is able to take the deduction he or she anticipates, some planning is needed. The taxpayer should speak with the organization to which the donation will be made, establishing a positive relationship (if one does not already exist) and ensuring that all documents needed to facilitate the donation and allow the donor to claim the charitable deduction are properly executed. An experienced tax and estate planning attorney can advise the donor as to how best to lay the groundwork for a successful donation.

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