Charitable Contributions of Property: Maximizing the Deduction

Determining fair market value

For most property donations, your deduction is the property's fair market value at the time you give it, the price a willing buyer and willing seller would agree on, neither under pressure and both reasonably informed. A few categories need special attention. Used clothing and household items are usually worth far less than their original price; think consignment or thrift shop pricing, not retail. No deduction is allowed for items not in at least good used condition, unless you're claiming more than $500 for a specific item and attach a qualified appraisal. Vehicles are valued using a used-vehicle pricing guide's private-party figure, adjusted down for condition, and if you claim more than $500 for a donated vehicle, your deduction is capped at the smaller of its fair market value or what the charity actually nets when it sells the vehicle. Art and antiques generally need a written appraisal unless the claimed value is $5,000 or less, and donations of $20,000 or more in art require attaching the full appraisal to your return, with a $50,000-plus valuation eligible for an optional IRS Statement of Value requested before you file.

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Property subject to special rules

Several categories of property carry their own specific limitations beyond the general fair market value rule: clothing and household items, vehicles, taxidermy property, property subject to a debt, a partial interest in property, a fractional interest in tangible personal property, a qualified conservation contribution, a future interest in tangible personal property, business inventory, and patents or other intellectual property.

A few of these are worth flagging specifically. If you contribute property that's still subject to a debt, such as a mortgage the recipient assumes, your deduction is reduced by the outstanding debt amount, and special rules prevent double-dipping on related interest deductions. Generally you can't deduct a gift of less than your entire interest in property; giving someone the right to use your vacation home for a month, for instance, isn't deductible, though narrow exceptions exist for things like a remainder interest in your home. A gift of a future interest in tangible personal property, where you keep some right to possess or enjoy it in the meantime, isn't deductible until that retained interest actually ends. Donated business inventory is generally valued at the smaller of its fair market value or its basis, not its full retail worth. Patents and other intellectual property are similarly limited to the smaller of basis or fair market value, with additional restrictions on the deduction period.

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Property that has decreased in value

If an item is worth less than what you paid for it, clothing, furniture, and cars are common examples, your deduction is limited to its current fair market value. You can't claim the difference between what you paid and what it's now worth as an additional loss; that gap simply isn't deductible.

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Property that has increased in value

Appreciated property splits into two categories with different rules. Ordinary income property, inventory, art you created yourself, or anything that would generate ordinary income or short-term gain if sold, generally limits your deduction to your basis (cost), not the higher current value, since you have to subtract out the portion that would have been ordinary income. Capital gain property, generally assets held more than a year, usually lets you deduct the full fair market value, which is what makes donating long-held appreciated stock or real estate particularly efficient: you avoid the capital gains tax you'd owe on a sale while still getting a deduction for the full current value. There are exceptions where the deduction gets reduced to basis instead, notably for certain tangible personal property the charity doesn't use in connection with its exempt purpose, or that gets sold within three years of the gift.

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Food inventory, bargain sales, and penalties

Businesses that donate apparently wholesome food inventory, food meeting all applicable quality and labeling standards even if not readily marketable, to an organization that will use it for the care of the ill, needy, or infants, and that isn't transferred for money or other property, qualify for a specific enhanced deduction beyond the general inventory rules.

A bargain sale, selling property to a charity for less than its fair market value, is treated as part sale and part donation. The sale portion can generate a taxable gain even though the transaction as a whole benefits a charity, so it's worth running the numbers before assuming a bargain sale is purely a tax win.

Finally, be conservative with valuations. The IRS can impose a penalty if you overstate the value or basis of donated property, on top of simply disallowing the excess deduction.

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