Gifts of appreciated property to charity.

• Author: Burson, Robert T.

A very popular form of charitable giving today is donating appreciated property to charity. With the rising value of the stock market and real estate, many taxpayers have chosen to share their good fortune with others in this manner. The IRS encourages this form of giving, by allowing taxpayers to deduct the fair market value (FMV) of the asset donated; if the same asset were sold, it would generate a capital gain.

Charitable Contributions

In general, five different percentage limits apply to charitable deductions, all based on an individual's adjusted gross income (AGI).

The first limit is the 50% overall limit. To be currently deductible, charitable gifts taken together may not exceed 50% of a taxpayer's AGI. If donations exceed 50% of AGI in any year, the excess is carried forward as a deduction in future years. To complicate this simple concept, there are percentage limits based on the category of asset contributed as well as the type of charity to which the contribution is made.

Types of Charities

50% charities (also known as Sec. 501 (c) (3) charities). These charities are typically churches, schools, hospitals, governmental units, private operating foundations and other nonprofit agencies organized for charitable, religious, educational, scientific or literary purposes.

30% charities. These charities include veterans' organizations, domestic fraternal societies, nonprofit cemeteries and certain nonoperating private foundations.

20% charities. Typically, these charities are family-funded private foundations.

Category of Asset Contributed

Type 1. Cash and non-long-term capital gain property (basically, inventory or capital-gain-type assets held less than one year).

Type 2. Long-term capital gain property.

Second-Level Percentage Calculation

50% limit. Type 1 assets to 50% charities.

30% limit. Type 1 assets to 30% charities and type 2 assets to 50% charities.

20% limit. Type 1 assets to 20% charities and type 2 assets to 30% charities.

Because taxpayers can make donations of different asset categories to different types of charitable organizations, these limits need to be ordered:

1. Type 1 assets to 50% organizations.

2. Type 1 assets to 30% organizations.

3. Type 2 assets to 50% charities.

4. Type 1 assets to 20% charities.

5. Type 2 assets to 30% charities.

For California income tax purposes, the rules governing deductibility of appreciated asset donations are different from the Federal rules. When Congress first allowed taxpayers to...