Donation Vs. Cost Basis

Your deduction value for donated artwork often depends on where you donate it.

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Your basis for property refers to what you paid for it. However, even if you paid a fair price at the time you bought it, the value of the item can change, sometimes drastically, before you donate it. The starting point for determining the deduction value for your donation is the fair market value, but you may have to adjust it depending on what you're donating.

Property Declined in Value

If the property has declined in value, you're limited to deducting the fair market value of the item rather than what you paid for it. In addition, you can't claim a loss on the donation. For example, if you buy stock for $50,000 but its fair market value declines to $30,000 and you donate it, you can only deduct $30,000, and the $20,000 loss isn't deductible. Instead, consider selling the property so you can claim a loss and then donate the cash.

Long-Term Capital Assets

Donating appreciated long-term capital assets, such as publicly traded stock, offers multiple tax benefits. First, your deduction equals your basis plus any increase that would have been treated as long-term capital gain if you had sold the asset. Long-term gains come from selling assets you've held for a year or more. For example, suppose you bought stock for $10,000 five years ago. If the stock has grown to $16,000 and you donate it, you can deduct the full $16,000 even though your basis is only $10,000. And you never pay taxes on the gain.

Ordinary Gain Property

If, on the other hand, the increase in the asset's value would be treated as ordinary income if you sold the property, you can't deduct that portion and you're left with only your basis as your deduction. For example, suppose you bought stock for $10,000 five months ago. If the stock has grown to $16,000 and you donate it, you can deduct only your basis of $10,000, because the $6,000 of gain is short-term capital gain, which is treated as ordinary income.

Tangible Personal Property

Special rules apply to tangible personal property, such as a book, car or painting. If the property is going to be used by the charity in its mission, you can include long-term capital gains as part of the donation deduction. But, if the charity doesn't use it as part of its mission -- if the charity, for example, just sells it to raise money -- you can't include the gain. The ordinary income portion is never deductible. Suppose you donate a sculpture that cost you $15,000 three years ago and is now worth $25,000. Because you held it for more than one year, the $10,000 is long-term capital gain. If the charity uses it for its mission -- say, if you donate it to an art museum that puts it on display -- you can deduct the full $25,000. However, if you donate it to a charity that sells it to raise money for its operations, you can only deduct $15,000.