There might be a pile of untapped tax write offs lurking in your home or personal inventory. Most people don’t have a hint of this, because the IRS doesn’t advertise some creative tax strategies it has approved for years. If you know about this strategy, you can give property away, take a deduction for it, and continue to enjoy it.
Let’s take a quick review of the tax rules for deducting contributions of property. If you give a charity appreciated stocks or mutual funds that have been held for more than one year, in most cases you can deduct the full fair market value up to 50% of your adjusted gross income. No one pays taxes on the appreciation. But if you give personal property, such as art or other collectibles, that you owned for more than one year, you can deduct the full fair market value, up to 30% of your adjusted gross income.
Excess deductions can be used in future years up to five years. But the charity must use the property in a way that is related to its exempt purpose. It cannot sell the property and use the cash proceeds. You and the charity might be able to creatively agree on what assets are related to the exempt purpose.
Now comes the good part. Nothing in the law says that you have to give away the entire property. Whatever part you give away has to be given completely. But you can keep part for yourself. That means you can give fractional interests or give on the installment plan.
Suppose you have some art that you enjoy. But you plan to give it away eventually and could use a tax break today. You could give a museum a 10% interest in the art every year for 10 years. That gives the museum the right to have the art for 10% of the first year, 20% the second year, and so on. But you get it the rest of the time, and you deduct 10% of the value each year. It is possible that as the museum displays the art, its value could rise. That gives you higher deductions each year, because the deduction will be 10% of the new value each year.
Instead of giving the art on the installment plan, you could just give a one-time fractional share. You could give a charity 25% of the property and deduct that amount. This lets the charity have the property one quarter of the year. You keep it the rest of the year. You can draft rules to avoid disputes over who gets the property at different times.
It also works with real estate. For example, if you own a beach house you can give a charity ownership during the off-season months. The charity might find the house useful for staff retreats or employee rewards.
Here’s another variation. You plan to buy some art. You donate half the planned purchase price to a museum and deduct that contribution. Then you and the museum jointly purchase the art. Eventually you’ll donate your half to the museum. If it has appreciated, your deductions will be greater than your initial cost. But there cannot be a written contract to jointly purchase the art at the start if you want to be able to deduct your initial contribution.
The charity doesn’t have to take possession of the property for its time each year. In one case, a fractional interest in art was donated to a museum. But most years the museum let the other owner “store” it for the museum’s ownership period. That was normal, since most museums cannot display all their works all the time and keep a number of works in storage. As long as the museum has the legal right to the property, and you don’t impede the exercise of that right, you should get the deduction.
Get a letter from the charity asserting that it intends to use the property for its exempt purpose. Also for donations of property worth more than $500, remember to include Form 8283 describing the property with your tax return. If the donation is over $5,000 you have to attach a written appraisal.