Charitable Contributions of Appreciated Property

Instructor: Ian Lord

Ian has an MBA and is a real estate investor, former health professions educator, and Air Force veteran.

In this lesson, we will look at the tax implications of donating property that has appreciated in value to charity, with a focus on avoiding capital gains tax and reducing taxable income.

Appreciated Property Donation

It's December, which means Luke is getting bombarded with letters from charities asking for end of year donations! This year he noticed something new though in the mail. One of the charities suggested that with the good performance of the stock market this last year it might make sense to donate investments such as stocks or mutual funds in order to take advantage of the tax benefits. Luke is interested as he owns stock in a few different companies and wants to make a donation, but doesn't have much in the way of cash at this time. Let's walk Luke through the tax implications of donating appreciated property to a charity.

Tax Deduction

When property such as stock, real estate, or vehicles are donated to a charity the donor gets to deduct up to the fair market value of that property on his or her tax return. Fair market value refers to what the item is worth on the open market, not what the donor originally paid. A car usually depreciates, but in some cases such as classic cars the value can actually go up, or appreciates. We hope that any stocks or real estate we purchase goes up in value over time. The deduction reduces the amount of taxable income. If Fred has a taxable income of $50,000 and donates property worth $5,000, he now only has to pay taxes on $45,000.

Donating property that has gone up in value offers an additional advantage. Normally when a person sells property that is worth more than what was paid, capital gains taxes are owed on the difference between the buy and sale price. These taxes can range from 10% all the way up to the individual's income tax bracket depending on the person's income and the amount of time the asset was owned. But when this property is directly donated to charity, no capital gains taxes are due. The charity gets the benefit of the donation and the donor saves money by legally avoiding capital gains as opposed to just writing a check.

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