Sharpe Advisor Resources
The following information and references to other resources may be beneficial to you and those who assist you in your estate and financial planning.
Amount of Donor’s Charitable Contribution—Securities
Securities held long term: In general, if an individual donates securities held long term to a public charity, such as a church, educational institution, health care organization or other cause, the amount they can claim as a charitable gift for federal income tax purposes is the securities’ fair market value on the date of the gift. See Internal Revenue Code section 170(b)(1)(A).
Long term means longer than one year. See IRC section 1222(3). The holding period to qualify as long-term property for deduction of appreciated property gifts at full market value is more than one year.
Securities held short term: The amount that can be claimed as a charitable gift in the case of donated securities held short term, on the other hand, is the donor’s cost basis in the securities if the cost basis is less than the securities’ fair market value. See IRC section 170(e)(1)(A).
Securities that have declined in value: Shares that have gone down in value since being purchased generally should not be donated because a gift of such an investment does not cause the potential capital loss to be realized for federal income tax purposes. Instead, the donor should sell the shares to realize the loss, to the extent possible, and give the cash from the sale.
Fair market value: For purposes of determining the amount of the donor’s charitable gift, the fair market value of publicly traded securities is generally the average of its high and low trading prices on the date of the gift. See Regulation section 25.2512-2(b)(1).
Private foundations: Special rules may apply to gifts of appreciated property to private foundations. See IRC section 170(e).
Donors should be well advised on current rules before completing such gifts.
The Donor’s Income Tax Charitable Deduction
The federal income tax charitable deduction is subject to various percentage limitations. Prior to the Tax Cuts and Jobs Act of 2017 (TCJA), the charitable deduction was limited to 50% of adjusted gross income (AGI). Gifts to public charities of cash, personal property and short-term capital gain property of all types were generally deductible up to this 50% limit. See IRC section 170(b)(1)(A).
Gifts to public charities of appreciated real property held long-term (together with certain other types of long-term appreciated property contributions) are generally deductible up to 30% of AGI. See IRC section 170(b)(1)(C).
The TCJA increased the amount of cash that can be deducted to 60% of AGI for gifts made between January 1, 2018, and December 31, 2025. See IRC section 170(b)(1)(G).
“Excess” contributions may be carried forward for up to five subsequent tax years. See IRC section 170(d)(1).
The interplay of the 60% and 30% limits and the carryover rules set out a hierarchy that governs the order in which various types of gifts (to public charities) are to be deducted as follows:
- Current gifts subject to the 60% limit.
- Current gifts subject to the 30% limit.
- Carried-over gifts subject to the 60% limit.
- Carried-over gifts subject to the 30% limit.
If a donor gives appreciated property—where capital gain realized if it were sold would be subject to the 3.8% Medicare contribution tax on “unearned income”—the gift would bypass the Medicare contribution tax and result in additional tax savings.
A Special Election
A donor of appreciated stock or other appreciated assets subject to the 30% limitation may find the 30% limit too tight a restriction and prefer that a higher limitation be applied to their gift.
For example, the donated asset may be only slightly appreciated. Or the donation may be very large relative to the donor’s income, with the result that much of the gift will have to be carried over into years when the donor will not be able to make use of deductions.
Donors in these circumstances may wish to use a special election under IRC section 170(b)(1) (C)(iii). The election permits the donor to deduct all “30%” gifts at cost basis but take the reduced gifts as a charitable deduction subject to a higher limitation under IRC section 170(b)(1)(A).
The election can be useful in some situations but needs to be considered carefully. The election applies to all gifts otherwise subject to the 30% limit (including carried-over contributions).
Repeal of Pease Limitation
In the past, some high-income earners could see their benefits from itemizing deductions reduced by the lesser of either 3% of their adjusted gross income exceeding a threshold amount or 80% of their deductions. Because this provision was repealed by the Tax Cuts and Jobs Act of 2017, donors who experienced this limitation in the past will now enjoy the full benefit of their charitable and other itemized deductions.
Substantiating Gift Value
Ordinarily, no qualified appraisal (as that term is defined in Reg. section 1.170A-13(c)) is needed to sustain a claim of an income tax charitable deduction with respect to a gift of publicly traded securities.
If, however, shares of stock are subject to a sale restriction—such as a restriction under Securities and Exchange Commission (SEC) Rule 144—then even though the stock itself is publicly traded, the shares are not considered to be publicly traded. They, therefore, fall within the requirement for a qualified appraisal if the donor claims a value of more than $5,000 for the shares. See Reg. section 1.170A-13(c)(7)(xi)(C).
Substantiation rules: It is important for donors to keep any written acknowledgments they receive from charities for charitable gifts. Since 1994, donors have been required to have special receipts from charities to which they have made gifts valued at $250 or more. Receipts must specify the value of any benefits received in exchange for gifts or state that no benefits were received.
“S” Corporation Stock
A provision in the Small Business Job Protection Act of 1996 allowed charities to be shareholders of “S” corporation stock beginning in 1998. Note, however, that any income or gain realized by the donee organization with respect to “S” stock is unrelated business income.
Special rules apply to gifts of stock options, warrants or restricted stock. Obtain specialized advice prior to making charitable gifts of such assets.
Gifts of U.S. Savings Bonds
Series E, H, EE and HH bonds accrue interest income over the period they are held. Generally, the donor is allowed to deduct the full value in the year the proceeds are given; however, he or she must also report the increase in value over the basis as income for that year. Therefore, it may be more advantageous to fund the gift with other securities that have been held long term.
Funding Alternative Charitable Gifts With Securities
It can be advantageous to use appreciated securities to fund qualified charitable remainder trusts and certain other gift planning arrangements that feature income for life or another period of time. The deduction in such cases is generally based on the full value of the securities transferred, and gain on the sale of the assets has historically been avoided at the time of the sale. See IRC section 664, regulations promulgated thereunder, and other relevant code sections and regulations for additional information.
Gifts of Closely Held Stock
In some situations, a person may wish to make a gift of stock in a closely held corporation. A donor who owns highly appreciated stock in a company that has significant cash reserves may be in the best position to make a sizable gift. Sometimes referred to as a “charitable stock bailout,” such a gift is often followed by a redemption of the stock by the corporation.
If the donor owns all stock in the company, the donor’s ownership percentage is not lessened by the gift, but cash to make the gift has effectively been provided by the corporation.
In a case where a donor wishes to pass control to another group of people, this gift will serve to lessen the donor’s percentage of ownership and increase the relative percentage of ownership by others without incurring gift tax or estate tax.
The IRS has also ruled, however, that neither the donor nor the corporation may be in a position to compel redemption of the stock (for example, under an agreement entered into before the gift is made). See Revenue Ruling 78-197. The donor will receive a deduction for the full value of the stock. The deduction for the gift is limited to 30% of the donor’s AGI. See IRC section 170(b)(1)(C). A qualified appraisal is required if the claimed value exceeds $10,000. See Reg. section 1.170A-13(c) (2)(ii).
Gifts of Cryptocurrency
As times change and technology continues to innovate, virtual currencies (also called cryptocurrencies) like Bitcoin, Litecoin, Ethereum and others can be used to fund charitable gifts. As with any noncash asset held over a year, cryptocurrency should be donated directly to charity rather than selling it and donating the proceeds.
An individual’s tax deduction will be equal to the fair market value of the Bitcoin based on its value at the time of the gift, and they will avoid owing capital gains taxes on the appreciation.
An individual can also make a gift of cryptocurrency and retain income for life or the life of another, like a spouse, parent or other loved one. These plans offer attractive deductions for a portion of the gift while reserving payments from the assets that may be favorably taxed.
Other Available Information
See www.irs.gov for a variety of publications and forms including:
- Charitable contributions (#526).
- Noncash contributions form and instructions (#8283).
- Determining the value of donated property (#561).
Amount of Donor’s Charitable Contribution—Real Estate
Several characteristics of the real estate being given are taken into account when determining the donor’s tax benefits. Length of time the property has been owned and whether it has increased or decreased in value are two of the key factors.
Real estate held long-term: If an individual donates real estate held long-term (i.e., longer than one year) to a public charity, the amount they can claim as a charitable contribution for federal income tax purposes is generally the property’s fair market value on the date of the gift. See Internal Revenue Code section 170(b)(1)(A).
Depreciated real estate: If improved property for which depreciation has been claimed is donated, the donor’s charitable contribution is reduced by the amount of depreciation that would be recaptured as ordinary income if the property were sold. See IRC section 170(e)(1)(A).
If the depreciation claimed has been straight-line, the donor’s charitable contribution is generally not reduced (because straight-line depreciation is generally recaptured under IRC section 1250 as capital gain rather than ordinary income). This can make donating depreciated property for which straight-line depreciation has been claimed especially attractive. Under current law the amount of straight-line depreciation taken could be subject to a maximum tax rate of 25% if the property were sold. The depreciation could also be subject to the 3.8% Medicare contribution tax, depending on the donor’s income level.
Fair market value: For purposes of determining the amount of the donor’s charitable gift, the fair market value of real estate is generally the price at which it would transfer between a willing buyer and a willing seller, each having full knowledge of all facts relevant to the property’s value. See Regulation section 1.170A-1(c)(2).
Limits on the Income Tax Charitable Deduction
The federal income tax charitable deduction is subject to various percentage limitations. Prior to the Tax Cuts and Jobs Act of 2017 (TCJA), the charitable deduction was limited to 50% of adjusted gross income (AGI). Gifts to public charities of cash and short-term capital gain property of all types were generally deductible up to certain AGI limitation. See IRC section 170(b)(1)(A).
Gifts to public charities of appreciated real property held long-term (together with certain other types of long-term appreciated property contributions) are generally deductible up to certain AGI limitation. See IRC section 170(b)(1)(C).
The TCJA increased the amount of cash that can be deducted to 60% of AGI for gifts made between January 1, 2018, and December 31, 2025. See IRC section 170(b)(1)(G).
Excess contributions may be carried forward for up to five subsequent tax years. See IRC section 170(b)(1)(D).
A Special Election
A donor of appreciated real estate or other appreciated assets subject to the 30% limitation may find the 30% limit too tight a restriction and wish that a higher AGI limitation be applied to the gift.
A donor in these circumstances may wish to use a special election under IRC section 170(b)(1)(C)(iii). The election permits the donor to deduct the adjusted cost basis of gifts of appreciated real estate and other qualified capital assets and take that amount as a charitable deduction subject to the higher limitation).
Determining Gift Value
A qualified appraisal—as that term is defined in Reg. section 1.170A-13(c)—is generally needed to sustain a claim of an income tax charitable deduction with respect to a donation of real estate if the claimed value of the property (or the aggregate claimed value of all real estate gifts made during the year) exceeds $5,000.
In addition to obtaining a qualified appraisal, the donor is required to file an appraisal summary—IRS Form 8283—with the federal income tax return on which the gift is first claimed or reported. See Reg. section 1.170A-13(c)(2). The appraisal summary must be acknowledged (signed) by the donee organization. In the case of noncash contributions valued at more than $500,000, a copy of the qualified appraisal must be attached to the return.
If the donee organization sells or otherwise disposes of donated property for which it has signed a Form 8283 within three years of the date of the gift, it must report the sale to both the IRS and the donor on IRS Form 8282. See Reg. section 1.170A-13(c)(4)(iii).
Other rules: Special receipts stating that no tangible benefits were received by a donor in connection with a gift are now required for gifts of cash or property valued at $250 or more. This requirement is in addition to the qualified appraisal rules described above. Donors should keep all receipts and letters of acknowledgment in order to substantiate their deductions. See IRS publications numbers 526 and 1771 (available online at www.irs.gov).
Special Gift Opportunity With Personal Residences and Farms
Under IRC section 170(f)(3)(B)(i), a current income tax charitable deduction is allowed for the donation of a remainder interest in a personal residence or farm. The remainder interest may take effect at the end of one or more person’s lifetime or other period of time determined by the donor.
The term personal residence is not limited just to the donor’s principal residence but includes secondary residences such as vacation homes (so long as the secondary residence does not fall into the category of rental or investment property).
The term farm is also defined broadly. It includes, for example, agricultural property leased to a tenant.
This gift arrangement can be an ideal way for an individual or a couple who plan to leave a farm or personal residence to a charitable interest at death and are no longer subject to estate tax to do so while enjoying immediate tax benefits.
Gifts of Real Estate With Retained Income
There are several ways real estate can be given for charitable use in such a way that donors retain income for life or other period of time for themselves and/or others of their choosing. Perhaps the most popular way to accomplish this is through the use of charitable remainder trusts. See IRC section 664 and regulations thereunder for the rules governing the tax considerations of such trusts.
There are several types of charitable remainder trusts:
- Trusts that pay a fixed amount each year regardless of the earnings and/or value of underlying trust assets are known as charitable remainder annuity trusts.
- Charitable remainder unitrusts feature income that varies over time with the investment performance of the trust.
- A straight unitrust pays a predetermined percentage of the value of the trust assets as valued annually.
- A net income unitrust pays the required percentage of the annual value of the trust assets or the actual earnings of the trust, whichever amount is less. A net income unitrust can be designed to “make up” in future years any amount by which the earnings fell short of the percentage payment amounts in one or more previous years. This is done using earnings that are in excess of the unitrust percentage payment amount required to be paid in such a future year.
Because real estate can sometimes require an extended time to liquidate via sale, and the net proceeds of a sale may not be readily predictable at the time a trust is funded, charitable remainder annuity trusts are rarely funded with real estate, as they may require payments to begin before donated real estate has been liquidated. The vehicle of choice has traditionally been the net income unitrust with or without a makeup provision, as the donor chooses.
IRS regulations provide guidelines for another option known as a flip unitrust. Under the terms of such a trust, assets like real estate that may not be readily marketable are placed in a unitrust that functions as a net income trust until such time as the property is sold or in the event of another “trigger event.” At such time, the trust “flips” and becomes a straight unitrust that pays a set percentage of the trust assets each year beginning in the first year following the trigger event. See regulations in IRC section 664 for more information on this alternative.
It is sometimes possible to fund other life income gift plans, such as pooled income funds and gift annuities, using real estate as a funding source depending on state regulations, marketability of property and other factors.
In general, if an appreciated asset is given to a charitable organization, the donor does not realize the appreciation as a capital gain for federal income tax purposes. This is because gain is generally realized only if an appreciated asset is sold or exchanged; a charitable contribution is merely a donative disposition.
If appreciated property subject to a mortgage is given to charity, however, the transaction is treated as a bargain sale under Reg. section 1.1011-2, and the donor must realize a portion of the appreciation as a capital gain.
For example, if property worth $100,000, having a $40,000 adjusted basis in the donor’s hands and subject to a $20,000 mortgage, is given outright to a charitable organization, the donor realizes a gain of ($100,000 – $40,000) x ($20,000/$100,000), or $12,000.
The donor is also entitled to claim a charitable deduction of $80,000—their equity in the donated property.
Note that in the case of property that has been subject to accelerated depreciation, a portion of the gain realized by the donor may be ordinary income—representing recapture of depreciation claimed in excess of straight-line.
Transfer of mortgaged property to a charitable remainder trust: The transfer of mortgaged property to a charitable remainder trust (as defined in IRC section 664) can involve several complex tax issues and result in the disqualification of the trust. Seek qualified tax counsel early in the planning process for this type of transaction.
Miscellaneous Planning Considerations
Those making gifts of real estate should also consider other pitfalls that could jeopardize the benefits of such gifts.
Buyer-in-the-wings: A common problem encountered in planning a gift of real estate is if, before making the gift, the donor has engaged in negotiations with a potential buyer of the property. If the donee organization (or trustee, in the case of a charitable remainder trust) sells the property to this buyer, there is a risk (the degree of which varies from situation to situation) that the donor will be deemed to realize the gain on the sale under the theory that the donee (or trustee) is a mere conduit for carrying out a prearranged sale.
For donors’ protection, they should not enter into a legally binding sale agreement prior to making a gift of real estate, and the donee organization (or trustee) should enter into independent negotiations with the buyer subsequent to the gift. In each case, however, the donor’s own attorney needs to make an independent professional judgment as to how best to protect the client’s tax position.
Hazardous waste: From a donee organization’s standpoint, real estate gifts can pose special risks because of potential clean-up liability under the Superfund Clean-up Act (42 U.S.C. section 9601, et seq.). For this reason, before a gift of real estate is accepted, an environmental audit (a stage 1, or phase 1, audit) of the property is often performed.
This information is solely educational, namely, to provide general gift, estate, financial planning and related information. It is not intended as legal, accounting or other professional advice, and you should not rely on it as such. For assistance in planning charitable gifts with tax and other implications, the services of appropriate and qualified advisors should be obtained. Consult an attorney for advice if your plans require revision of a will or other legal document. Consult a tax and/or accounting specialist for advice regarding tax and accounting related matters.