Noncash Gifts to Charity

*Photo by Alden Jewell is licensed under CC 2.0. *

Understanding how gifts to charity interact with the tax code is important for estate planning. Gifts to charity are a good way to shrink your estate in a manner that avoids both the gift and estate tax. For large estates, this can be quite a significant issue. For smaller estates, however, understanding the income tax side of such gifts can be beneficial in lowering your income tax bill, even if the estate or gift tax is not a concern.

In a previous post, I provided a broad overview of the interaction between charitable giving and the tax code. In this post, I will specifically discuss noncash gifts to charity. Most people are familiar with cash gifts to charity, but noncash contributions can come with their own unique and significant tax advantages.

Common Noncash Gifts to Charity

The most well-known noncash gifts to charity are gifts of financial instruments, like stocks and bonds, and real estate. These provide a great advantage to the giver in that the donation is not a taxable gift. In addition to avoiding any gift tax implications, the giver—subject to some limitations—receives an income tax deduction equal to the value of the property, and the donor escapes any capital gains that he or she would have incurred had the property been sold.

Therefore, the donation of highly appreciated property can serve as a valuable part of a tax-reduction strategy. Donating property that has depreciated in value, however, is generally of little value. In most circumstances, the donor would be better off selling the property at a loss—so that he or she could claim that loss—and then giving the money to charity for an additional deduction.

Bargain Sales to Charity

A bargain sale occurs when a person sells a property to a charitable organization for less than fair market value. Bargain sales are therefore treated partly as a donation and partly as a sale.

In the course of my career, I have seen landlords sell commercial properties worth millions of dollars for $100,000-$200,000. This allowed them to pocket some money, while also receiving a significant tax deduction. As this example illustrates, the best time to make such donations is when the giver wants to get rid of a piece of a large real estate tract. The real estate may not have the profit potential it once did, even though it is still technically worth a great deal of money. A full sale may therefore not be a realistic possibility, or, if it is, the time horizon may be beyond what the owner of the real estate desires.

What constitutes a bargain sale is not always readily apparent. For example, a gift of encumbered property—for example, a gift of real estate encumbered by a mortgage—even if it is an outright gift is treated as a bargain sale to the extent that the outstanding liability exceeds the giver’s basis in the property. This is to recognize the benefit the donor receives by escaping from underneath the liability the encumbrance imposes.

These are just some of the common examples of noncash donations to charity. In a future post, I will discuss another popular noncash gift to charity: a gift of less than an entire interest.

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See Also:

Charitable Deductions

Giving Gifts of Partial Interests to Charity