In a previous blog I wrote about donating your tangible property to charity – which could include artwork, jewelry, cars, or antiques, just to name a few examples. If you are considering this to divest yourself of your collection, or part of your collection, then it is likely that you have charitable intent. Beyond that, it is important to consider if donating to charity makes sense financially, and how much you want to base your decision off of that.
Financially speaking, gifting your tangible assets to charity makes the most sense if the property has appreciated significantly. This is no different than gifting your appreciated stocks from your investment portfolio. But of course, this is not the only consideration – especially for tangible property.
In the previous blog mentioned above, I only discussed donating directly to a public charity and the rules of doing so. However, there are other options to consider as well:
Donating to a Public Charity
There are numerous requirements to qualify for a tax-deductible gift when you donate collectibles to charity. The gift of tangible property must satisfy the following criteria:
- You are donating to a qualified 501(c)3 charitable organization.
- The items are qualified capital gains property. In general, this means that you have held the property for more than one year, and you did not create the property yourself.
- The receiving organization must make “related use” of the donation and retain the property for at least three years. Your gift must relate to the tax-exempt purposes of the charity to which it’s donated. In other words, the organization must use your donation to fulfill their mission. If the property is donated to a charitable organization that does not use it as part of its charitable mission, your deductible amount is limited to the lesser of cost basis or fair market value.
- The donated property must have a qualified appraisal. The IRS requires a qualified appraisal if the gift of property is greater than $5,000. If the gift is greater than $20,000, then a copy of the signed appraisal must be included with the tax return filing.
Most importantly, above all of the rules set forth by the IRS explained above, you need to find a charitable organization that wants and is willing to accept your donation and use it for at least three years. Even if your donation would qualify as a related use donation, that does not mean the organization necessarily wants to (or even can) accept the donation.
Donating to a Donor Advised Fund
When donating to a Donor Advised Fund, the same “related use” rule applies as described above, so your deductible amount would be limited to the lesser of cost basis or fair market value. This might still make sense if you cannot find a charitable organization that fulfills the related use rule, and your goals include funding a charitable account, avoiding capital gains taxes, and/or minimizing estate tax exposure.
Donor Advised Funds could also be attractive if, in addition to the reasons listed above, you liked the idea of gifting the proceeds to various charities as opposed to just one.
Donating to a Private Foundation
A Private Foundation offers yet another option to donate your collection. Some of the benefits are as follows:
- The collection can remain a permanent part of the Foundation. A Private Foundation can hold any type of asset. This is one of the main differences between a Foundation and Donor Advised Fund.
- The donor can retain a high level of control over the foundation, which would include the collection within it.
- When donating to a Private Foundation and determining the tax deductibility of your contribution, the same “related use” rule applies as described above. In short, to receive a tax deduction for the donation’s fair market value, the foundation must be recognized as an operating foundation and utilize the donated property to fulfill its mission. A non-operating, or grant-making, foundation is more similar to a Donor Advised Fund from a tax deduction perspective. You will likely be limited to the lesser of cost basis or fair market value.
There are significant rules, regulations, and costs associated with starting a Private Foundation that should be considered.
If you are interested in divesting from your collection, a form of charitable gifting might make sense if you have charitable intent and/or would like to avoid taxes. Every situation is unique depending on the composition of your collection and your ultimate goals. Please reach out to me or your RegentAtlantic Wealth Advisor with any questions. We can help achieve your goals within the framework of your overall financial picture.
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