When property is donated to a charitable organization, the property must be valued in order for you to take a tax deduction. The value of a cash donation is easy to determine because it's the amount of the cash donated.
Determining the value of noncash property is a little more complicated. Most of the time, the amount of the deduction is measured by the property's fair market value. Other times, the deduction is measured by your basis in the property.
General Rule: Fair Market Value
Noncash property has two key characteristics: its value and your basis in it. Your basis is what you paid for it.
The general rule is that if a charitable contribution is made in property other than money, the amount of the contribution is the fair market value of the property at the time of the contribution. Fair market value (FMV) is how much an ordinary buyer would pay for the property and how much the ordinary seller would sell it for.
Sometimes, you may not be able take a deduction for the full fair market value of the donated property. When this happens, the amount of the deduction is basically your basis in the property. This commonly happens when the donation involves ordinary income property and capital gain property.
Ordinary income property. When you make a charitable donation of property, the sale of which would have produced either ordinary income or short-term capital gain, the measure of the contribution is your basis in the property, not the property's FMV. Examples of this include:
- Works of art, literature, music or the like created by you
- Capital assets held for less than one year, such as a home or other real estate
Capital gain property. Capital gain property is something that would have produced a long-term capital gain if it had been sold instead of donated. Usually, the FMV is used to figure the tax deduction. However, there are times when your basis will be used to determine the deduction, such as when you:
- Donate the property to certain private foundations and the property isn't qualified appreciated stock
- Donate tangible personal property to a charity and the charity puts the property to a use that's unrelated to the charity's main purposes
- Choose to use the basis when figuring the deduction
Exception to Exceptions
If you report ordinary or capital gain income in connection with a donation, neither the ordinary income property exception nor the capital gain property exception applies.
For example, you donate an installment note to a charity. The note has a fair market value of $10,000, and your basis in the note is $7,000. As a result, you'll have a short-term capital gain of $3,000 (FMV - basis, or $10,000 - $7,000). Since the $3,000 in income is reported in the year of contribution, you can use FMV and take a $10,000 deduction.
Special Rules for Specific Property
Special rules apply for certain kinds of donated property, including:
- Inventories. You can deduct the sale price of these items
- Cars, boats and planes. You can deduct the fair market value, but you have to able to substantiate the claimed value
- Stock. For stock that's actively traded, its fair market value is the average price between the highest and lowest selling prices on the valuation date
The IRS has detailed explanations and instructions to help you take the proper deductions. If you still have questions after reading them, talk to a professional tax preparer or a tax lawyer before you file.
Questions for Your Attorney
- What's the fair market value of property if a house on the property has been damaged by fire?
- If I paint a picture and donate it to my old high school, how much can I deduct on my taxes?
- If I buy a necklace at an estate sale for $10 and it turns out that it is worth $10,000, how much can I deduct on my taxes if I donate the necklace to a university for its auction?