Donating Appreciated Assets
Many individuals find they can recognize substantial tax benefits by donating long-term appreciated property to charity.
Take, for example, an individual who wished to make a gift of $12,000 in long-term (held more than one year) appreciated securities to a favorite environmental charity. The shareholder purchased the shares for $2,000 in 1990 and they have since appreciated in value $10,000. The shareholder decides to donate the securities because, although they have increased in value over the years, they no longer fit into the shareholder's overall investment plan and perhaps have even lost a bit of value recently.Avoiding capital gains via long-term appreciated gifts
Because the shares are going to a qualified organization, the donor will not realize any capital gains at the time of the gift, thereby avoiding payment of capital gains taxes on the appreciation of these securities. Plus, the value of the donation is the fair market value of the securities on the date of the gift, which is deductible from the donor's federal income taxes (up to the IRS limits).
Action Idea: You may wish to consider giving other than cash. Property, especially appreciated assets, could be a welcome gift to a charity and produce a valuable tax break for you.
If the shareholder had instead sold the shares before giving them to the environmental group, he would have faced capital gains taxes of up to $1,500 (i.e., 15% of $10,000) and the net proceeds available to give to charity would be less. Both the donor and the recipient charity would not have received the maximum benefits – a smaller charitable income tax deduction for the donor and a smaller contribution received by the organization.
However, as noted in the discussion of IRS donation limits, there are limits on such gifts of appreciated property. Contributions of long-term capital gain property to 50% limit institutions are limited to 30% of AGI. Similar contributions to 30% institutions are limited to 20%.
Contributions of cash and short-term capital gain property remain subject to the 50% AGI limitation. For short-term capital gain property, you can only deduct the original cost of the stock – rather than its appreciated value like you can with long-term capital gain property.
Your depreciated securities also may be able to provide tax benefits to you and a charity. Gaining the maximum benefit, however, requires more than simply signing over the asset to the charity.
If you donate the security, your deduction is limited to the asset's current market value. For a stock purchased for $10,000 which is now worth half that, your deduction is the current value of $5,000 if you are making the gift now.
Action Idea: You may wish to investigate selling depreciated assets and contributing the proceeds so that the loss can be used to reduce your taxes.
If you sell the security, you can use the loss to offset any capital gains you might have realized during the tax year or up to $3,000 of ordinary income. Then donate the cash from the sale to the charity, thereby getting a charitable tax deduction for the cash gift.
In the case of real property, when you donate an asset that has lost value during your ownership, your deduction is limited to the lower of the asset's current market value or its net cost basis, i.e., cost less depreciation. If the property is fully depreciated, you get no tax deduction.