Charitable gifts of partial and undivided interests.

• Author: Fridman, Lana

For income tax purposes, a charitable deduction is generally not allowed for a gift of a partial (i.e., less than entire) interest in property, according to Sec. 170(f)(3)(A). However, Sec. 170(f)(3)(B) permits a deduction for a gift of an undivided portion of a donor's entire interest in property.

Partial vs. Undivided Interests

How does a taxpayer distinguish between the two ways of gifting?When a donor retains a substantial right or interest in donated property, he or she has given only a "partial interest" ineligible for a charitable deduction (unless such interest is in the form of a charitable remainder trust, pooled income fund, charitable lead trust, remainder interest in a personal residence, qualified conservation contribution or charitable gift annuity). Loans to charity are also partial interests for which no charitable deduction is allowed.

Definition: An "undivided portion" of a donor's entire interest in property is a fraction or percentage of each and every substantial interest or right the donor has in the property. It must extend over the entire term of the donor's interest and to other property to which such property is converted; see Regs. Sec. 1.170-A7(b)(1)(i).

While Sec. 170(a)(3) bars an income tax deduction for a gift of a future (e.g., remainder) interest in tangible personal property if the donor retains an intervening interest, Sec. 170(f)(3)(B)(ii) permits the deduction for a gift of an undivided interest in tangible personal property.

Example: X gives a 1/12 undivided interest in a sculpture to a museum, allowing it to display it one month per year. He can take a charitable deduction for 1/12 of the art's value. However, if X were to donate a remainder interest in the sculpture and retain a life estate, no income tax charitable deduction would be allowable.

A gift of an undivided interest is a good strategy to use when a taxpayer has a very valuable collectible and is unable to fully use the Sec. 170(b)(1)(B) charitable deduction, which is limited to 30% of adjusted gross income.

Letter Ruling 200223013

Facts: The donors (husband and wife) owned an art collection, some pieces of which they had already donated to a museum. Under a gift-and-loan agreement with that museum, the donors could make lifetime gifts of their entire undivided interest (but at least 1/12) in ally of their remaining art. If the donors transfer undivided interests, they will retain personal possession proportionate to their interest each...