Taxpayers can take a deduction for a contribution to a charity, and when the contributions are of property the deduction is generally equal to the fair market value of property. This has lead many people to believe there are advantages to contributing appreciated property to charities.
Example: If an estate planning lawyer bought stock for $1,000 five years ago that is now worth $10,000, it might be wise for her to donate the stock to her church rather than sell it. She could then claim a $10,000 deduction for contributions and avoid paying capital gains taxes on the $9,000 the stock has increased in value.
However, the charitable deduction in this case would be limited to 30% of the donor’s adjusted gross income for the year computed without regard to the charitable contribution or the net operating loss deductions. This is less than what she would be entitled to under the general rule, which allows charitable deductions to be up to 50% of this base amount.
The donor could also lose the deduction on the appreciated portion of capital gain property, if it is tangible personal property that is not used in the church’s exempt purpose, or if it is applicable tangible personal property that is sold rather than used in the organization’s exempt purpose. There is also a limitation for long term capital gains property contributed to certain nonoperating foundations. A special rule applies to qualified intellectual property which computes the charitable deduction based on the income the donor received from the intellectual property.
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