Donating Art: Ten TIPs Every Planner Should Know

Donating Art: Ten TIPs Every Planner Should Know

Article posted in Tangible Personal Property on 16 November 2004| 7 comments
audience: National Publication | last updated: 18 May 2011
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Summary

Cash donations, as long as the actual amount of the donation is substantiated, will not result in an IRS challenge. But donations of objects such as fine art and collectibles have always been problematic. In this article from Leimberg Information Services, Orange, California attorney Joy Gibney Berus shares ten "must know" TIPs on donating personal property items such as art, antiques, and collections so you may assist your clients in maximizing all of the benefits to which they are entitled.
Leimberg Information Services

by Joy Gibney Berus
Edited by Steve Leimberg

Introduction

Cash donations, as long as the actual amount of the donation is substantiated, will not result in an IRS challenge. But donations of objects such as fine art and collectibles have always been problematic.

This commentary will provide you with ten TIPs on donating personal property items such as art, antiques and collections so that you may assist your clients in maximizing all of the benefits to which they are entitled.

Why Donating Makes Sen$e

Donating art, antiques and other collectible objects to appropriate qualified organizations may provide your clients with possible benefits such as:

  • An immediate income tax deduction
  • Avoidance of the tax on capital gains on appreciated assets
  • An estate and gift tax deduction
  • The creation of a lasting legacy with their organization of choice
TIP #1: Donate Appreciated Objects

Your clients generally will receive a higher income tax deduction if they donate an art object or collection that has appreciated in value over the time they have owned it. This is called capital gain property. Generally, property is capital gain property if its sale at fair market value on the date of the contribution would have resulted in long-term capital gain. Capital gain property includes capital assets held more than one (1) year. The general rule is that a client can usually deduct the full fair market value of the donation as of the date of the contribution.

TIP #2: Donate Long-Term Capital Gain Objects

The amount your client can deduct for a contribution of ordinary income property is generally only the client's basis (cost) in the property, not the full fair market value. Property is ordinary income property if its sale at fair market value on the date it was contributed would have resulted in ordinary income or in short-term capital gain. Examples of ordinary income property are business inventory, works of art created by an artist donor, manuscripts prepared by the donor, and capital assets held one (1) year or less.

The deduction for appreciated long-term capital gain property is its full fair market value. The deduction for ordinary income property is the lesser of fair market value or its basis.

TIP # 3: Donate to a Public Rather Than Private Charity

In order to maximize your client's charitable deduction benefits, the qualified organization must be a public, not private, charitable organization.

In general, qualified public charitable organizations include nonprofit groups that are religious, charitable, educational, scientific, or literary in purpose, or that work to prevent cruelty to children or animals. You can ask the organization whether it is a qualified organization, and most will be able to tell you. Or, you can check IRS Publication 78, which lists most qualified organizations.

In most cases, your client will only receive a deduction of his or her cost for a contribution of appreciated art objects to a private charity. However, that same donor client would be allowed a deduction of the full fair market value if the contribution was made to a public charity.

TIP #4: Make Sure the Public Charity meets the "Related Use Rule"

The "related use rule" applies to capital gains property that is tangible personal property (objects) contributed to a public charity. The related use rule requires that the use of the art object by the organization be related to the purpose or the function constituting the basis for the organization's charitable exemption under IRC Section 501.

This means that the donated object must be of a type normally retained and exhibited by that charitable organization, such as a museum or educational institution that normally has a collection of similar paintings, or silver, or sports memorabilia. All of the appreciated value of the donated art object will be lost as a charitable deduction if the related use rule is not satisfied.

Let's look at Mr. Donor Client's donation, and the tax deduction benefit he would have received if he had made his donation to three different institutions:

Example:

Mr. Client purchased a sculpture by an unknown artist for $1,000.00 fifteen years ago. It has appreciated over the years as the artist has gained notoriety. Mr. Client obtains a qualified appraisal by a qualified appraiser. The fair market value on April 1, 2004, the date of his donation, is appraised at $15,000.00.

Donation #1: Mr. Client donates the sculpture to a private charity. He will only be able to receive a deduction for his cost, $1,000.00.

Donation #2: Mr. Client donates the sculpture to a public charity, but the charity's charitable exemption purpose was unrelated to his donated sculpture. He will only be able to receive a deduction for his cost, $1,000.00.

Donation #3: Mr. Client donates the sculpture to a public charity, and the use of the sculpture by the organization is related to the purpose or the function constituting the basis for the organization's charitable exemption. (It is an art museum with a collection of similar type sculptures). He will be able to receive a deduction for the full fair market value of the sculpture as of the date of donation, $15,000.00.

TIP # 5: Verify Acceptance of the Donation by the Qualified Organization

Make sure your client's designated public charity wants the object. The organization should provide a written acceptance indicating that the organization is a qualified public charity, and that it satisfies the related use rule regarding the particular donation and intends to use the gift in a manner related to its tax exempt status.

TIP #6: Consider a Partial Interest Donation

In certain circumstances, a gift of a partial interest in an art object or collection may be desirable to your client. Here, as an example, Ms. Donor donates a percentage of ownership of her painting, while retaining the remaining portion of ownership for herself, with the promise that full ownership will ultimately go to the charitable organization at a future date of her choice, such as the donor's date of death.

In cases like this, the receiving charitable organization would retain possession of the painting based upon its percentage of ownership. If a gift of a one-third (1/3) interest was given, and Ms. Donor retained the remaining two-thirds (2/3) interest, then the charitable organization would have possession of the painting for four (4) months of each year, and Ms. Donor would have possession of the painting for the remaining eight (8) months. The charitable organization would ultimately acquire the entire interest at the designated future date.

Ms. Donor's benefit in gifting the partial interest would be the allowable income tax deduction of one-third (1/3) of the fair market value of the painting at the date of donation. Additionally, Ms. Donor would have the continuing use and enjoyment of the painting for eight (8) months of each year.

Ms. Donor would also be able to make another additional partial interest donation to the same museum in the future, such as a second donation of another one-third (1/3) interest in the painting five years later. This time, the second gift of another one-third (1/3) interest in the painting may have a higher fair market value at the time of donation, not only because of the passage of five years time, but also because the provenance of the painting now includes its history as part of the collection of the museum!

This would now leave the museum with a two-thirds (2/3) interest in the painting, and possession for eight (8) months of the year, and Ms. Donor with a second income tax deduction and the use and enjoyment of the painting for four (4) months of the year until the ultimate transfer of the entire remaining interest at the designated date.

TIP #7: Consider a Charitable Bargain Sale

A bargain sale of personal property to a qualified charitable organization (a sale or exchange for less than the property's fair market value) is partly a charitable contribution and partly a sale or exchange.

With the bargain sale, your client sells his or her art object or collection to the charitable organization at less than fair market value. The transaction gives your client cash, plus a charitable income tax deduction for the difference between the fair market value of the gift and the amount the charity paid your client.

Generally, if the art object sold was capital gain property, your client's charitable contribution is the fair market value of the contributed portion.

The bargain sale is the only donation plan that can give your client both a lump sum of cash, and a charitable deduction.

TIP # 8: Retain a Qualified Appraiser to Prepare a Qualified Appraisal

Contributions of art objects and other personal property are reported on IRS Form 8283, Section A, for all contributions for the year over $500.00.

For deductions of art objects and other personal property over $5,000.00, Form 8283 Section B must be completed. This is signed by the donor, the donee and the appraiser. The donor must also obtain a separate qualified written appraisal of the donated property from a qualified appraiser.

The weight given an appraisal depends on the completeness of the report, the qualifications of the appraiser, and the appraiser's demonstrated knowledge of the donated property.

The appraiser must include in his or her appraisal the qualifications of the appraiser who signs the appraisal, including the appraiser's background, experience, education, and any membership in professional appraisal associations. The term "qualified appraisal" means an appraisal prepared by a qualified appraiser not earlier than sixty (60) days before the date of the contribution of the appraised property.

Any charitable contribution of an item of property, the claimed value of which exceeds $5,000.00, requires the donor to meet the following requirements:

1. Obtain a qualified appraisal for the property contributed which: Relates to an appraisal made not earlier than 60 days prior to the date of contribution of the appraised property, does not involve a prohibited appraisal fee, includes certain information (covered in IRS Publication 561), and is prepared, signed, and dated by a qualified appraiser.

2. Attach a fully completed appraisal summary to the tax return on which the donor first claims the deduction for the contribution (Form 8283); and

3. Maintain records containing certain specific information about the contribution.

Generally, the donor does not need to attach the qualified appraisal itself, but the donor should keep a copy as long as it may be relevant under the tax law.

If your client donates art objects valued at $20,000.00 or more, however, the client must attach a complete copy of the signed qualified appraisal.

TIP #9: Recommend Requesting a Statement of Value if your Client is Considering Donating an Object of Art that has been Appraised at $50,000.00 or More.

If your client is considering donating an object of art that has been appraised at $50,000.00 or more, you can recommend that he or she request a Statement of Value for that object from the IRS. The IRS user fee, which must be submitted with the request, is $2,500.00.

The donor must request the statement before filing the tax return that reports the donation. If the donor's request lacks essential required information, the donor will be notified and given 30 days to provide the missing information. This helps in avoiding penalties. For a request submitted, the IRS will issue a Statement of Value that can be relied on by the donor of the object of art.

TIP #10: Obtain the Advice and Assistance of Attorneys and CPAs Experienced in Charitable Donations of Personal Property Objects Such as Art, Antiques, and Other Collectibles

The total value of your client's charitable contribution deduction and certain other itemized deductions may be limited, depending upon your client's adjusted gross income and the amount and type of donation.

There are many other estate planning options available which are beyond the scope of this article, such as charitable remainder trusts, charitable remainder unitrusts, pooled income fund trusts, charitable lead trusts, and charitable lead unitrusts, and charitable annuities.

The above illustrations are examples of just a few of the variety of issues to be aware of when your client owns a valuable work or art, antique, or collection which he or she may consider donating to a charitable organization. There may be many options available to recommend to your clients so that they may maximize their charitable deductions benefits. Both your client and a qualified charitable organization may thank you.

CITE AS:

Steve Leimberg's Charitable Planning Newsletter # 55 at http://www.leimbergservices.com

Copyright 2004 Leimberg Information Services, Inc. Reprinted by Planned Giving Design Center, LLC with Permission. Reproduction in Any Form or Forwarding to Any Person Prohibited - Without Express Permission.

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Comments

car charitable deductions

Besides the valuation and related use issues, as of January 1st it will be moot for car donors. After January the tax deduction on donation of cars worth more than $500.00 will be limited to the amount that the non profit organization receives once the car has been resold. The non profit organization will be required to send the donor a letter informing the donor of the resale and the value that they can report to the IRS.

Art donations

Regarding Tip #7, does a bargain sale result in the same deduction regardless of the charity, or does the related use rule still apply? For example, if bargain sale is made to Red Cross for the basis of the painting, does donor receive NO deduction, or the difference b/w FMV and basis? Thanks.

appraisal rules

If a client donates to a qualified charity for a related use an object he has purchased for $25,000 within the last 6 months, would the client's cost basis (read: purchase price) be acceptable as a charitable deduction? would an appraisal still be required?

charitable deductions

would a car or boat or other form of transportation be deductible to my client if we are a Human Servics Agency?

appraisal

The anticipated donation is over $20,000.00. Please review Tip #8 again in my article, and Form 8283 and IRS Publication 561.

Great Article

Thank you for this will written, excellent overview. I found it very helpful.

Car or boat

I assume you are asking about the application of the related use rule. Unless the vehicle or vessel is a collectible that has appreciated in value, the related use issue is mostly moot because the amount of the deduction will be the same (i.e., if the vehicle has depreciated, it is worth less than its basis). Only the percentage limitation applicable to the deduction will be different -- 50% limit for unrelated and 30% for related. Of course, this also assumes your organization is a qualifed charity to which contributions are deductible.

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