Do you own a prized piece of art that you’d like to donate to charity? If you meet the requirements for gifts of property, you may qualify for an enhanced tax deduction. But be aware of potential tax pitfalls along the way.
“If you were awarded a piece of art (or even other property) and intended to donate the property to charity it is important to talk to a CPA professional first,” warns Manager Chris Cicalese, CPA, MSTFP. “By accepting the art and then giving the piece to charity you will have taxable income. If you donate the prize directly to charity and meet certain factors you may be able to avoid recognizing the value as income.”
Normally, your deduction for donated appreciated property is based on the cost when you acquired it. For example, if you paid $7,500 for a sculpture and it’s now worth $10,000, your deduction is limited to $7,500. However, if the property would have produced a long-term capital gain had you sold instead of donating it (i.e., you’ve owned it for more than a year), you can deduct the full fair market value (FMV). In other words, you’re then entitled to deduct a higher amount, even though you never paid tax on the appreciation in value. In our example, after one year you could deduct $10,000, the sculpture’s FMV on the donation date.
“Lending artwork to a museum does not constitute a donation for tax purposes, so you will not get a tax deduction,” advises Associate Partner Ren Cicalese III, CPA, MST.
The tax law generally limits your annual deduction for charitable gifts of property to 30 percent of adjusted gross income (AGI). If you can’t squeeze under the AGI threshold in a given year, the excess is carried forward for up to five years.
Yet there’s still another tax hurdle to overcome. If you donate property like artwork, the gift must be used to further the charity’s tax-exempt function. Otherwise, the deduction is limited to the property’s cost.
“If you have a collection of valuable art, you should discuss any plans to donate pieces of your collection with your CPA to help structure the donation and take advantage of current tax law, adds Ren Cicalese III. “Any artwork valued at over $5,000 will need a professional appraisal to substantiate the value. The IRS can and will review the appraisal to determine if the donated artwork is overvalued. If the appraised value is deemed inappropriate, the IRS will impose penalties on the taxpayer.”
For example, if you donate a family heirloom to a museum, you can claim the higher deduction based on FMV if it is prominently displayed. However, if it’s relegated to a dusty storeroom, your deduction is limited to the lower amount. In the event that the value of artwork has declined since you acquired it, your deduction is limited to the FMV, regardless of how long you’ve owned it.
Finally, the tax law imposes strict recordkeeping requirements on such charitable gifts, including independent appraisals for donations exceeding $5,000.
If you have questions about your donation, give our office a call.
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© MC 2017 | “Tax Tips” are published weekly to provide current tax information, tax-cutting suggestions, and tax reminders. The tax information contained in this site is of a general nature and should not be acted upon in your specific situation without further details and/or professional assistance.
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