The partial interest rule denies a charitable deduction for many different kinds of charitable gifts, including some that are valuable.
The key to understanding this rule is to grasp the concept of a partial interest. An analogy helps. Imagine you’re holding a handful of uncooked spaghetti. This is analogous, for example, to holding legal title to a piece of real estate. Each spaghetti strand represents a right to or interest in the real estate. One strand represents the right to harvest fruit from trees growing on the land. Another strand represents the right to lease the land to a third party. A third strand might represent the right to extract water flowing beneath the surface of the land. And so on.
Let’s suppose the owner of real estate gives to charity the right to harvest fruit on the property. This is a partial interest gift for federal tax purposes. It’s a partial interest as opposed to the owner’s entire interest in the real estate. It’s one strand of spaghetti as opposed to the whole handful of strands.
The tax law generally denies a charitable deduction for a partial interest gift. For example, no charitable deduction would be allowed for giving to charity just the right to harvest fruit on land owned by the donor, even though this right might be quite valuable.
There are some important exceptions to the rule denying deductibility. One of these is that a charitable deduction is allowed for giving to charity a partial interest that is the donor’s entire interest. For example, donor acquired some years ago the right to harvest fruit on property owned by a third party. If this is the donor’s only interest in the property, the donor can get a charitable deduction for giving this interest to charity.
We’ll continue this discussion next time. Click here to read part two.
By Jon Tidd