Contributions of Property If you contribute property to a qualified organization, the amountof your charitable contribution is generally the fair marketvalue of the property at the time of the contribution. However,if the property has increased in value, you may have to make someadjustments to the amount of your deduction. See Giving PropertyThat Has Increased in Value, later. For information about the records you must keep and the informationyou must furnish with your return if you donate property, seeRecords To Keep and How To Report, later. Contributions Subject toSpecial Rules Special rules apply if you contributed: Property subject to a debt, A partial interest in property, A future interest in tangible personal property, or Inventory from your business. These special rules are described next. Property subject to a debt.If you contribute property subject to a debt (such as a mortgage),you must reduce the fair market value of the property by: Any allowable deduction for interest that you paid (or willpay) attributable to any period after the contribution, and If the property is a bond, the lesser of: Any allowable deduction for interest you paid (or will pay)to buy or carry the bond that is attributable to any period before thecontribution, or Travel to HungaryThe interest, including bond discount, receivable on thebond that is attributable to any period before the contribution, andthat is not includible in your income due to your accountingmethod. This prevents a double deduction of the same amount asinvestment interest and also as a charitable contribution. If the debt is assumed by the recipient (or another person), youmust also reduce the fair market value of the property by the amountof the outstanding debt. If you sold the property to a qualified organization at a bargainprice, the amount of the debt is also treated as an amount realized onthe sale or exchange of property. For more information, seeBargain Sales under Giving Property That Has Increasedin Value, later. Partial interest in property.Generally, you cannot deduct a charitable contribution (not made bya transfer in trust) of less than your entire interest in property. Acontribution of the right to use property is a contribution of lessthan your entire interest in that property and is not deductible. Example 1.You own a 10-story office building and donate rent-free use of thetop floor to a charitable organization. Since you still own thebuilding, you have contributed a partial interest in the property andcannot take a deduction for the contribution. Example 2.Mandy White owns a vacation home at the beach that she sometimesrents to others. For a fund-raising auction at her church, she donatedthe right to use the vacation home for one week. At the auction, thechurch received and accepted a bid from Lauren Green equal to the fairrental value of the home for one week. Mandy cannot claim a deductionbecause of the partial interest rule just discussed. Note:Lauren cannot claim a deduction either because she received abenefit equal to the amount of her payment. See ContributionsFrom Which You Benefit, earlier. Exceptions.You can deduct a charitable contribution of a partial interest inproperty only if that interest represents one of the following: A remainder interest in your personal home or farm. Aremainder interest is one that passes to a beneficiary after the endof an earlier interest in the property. Example. You keep the right to live in your home duringyour lifetime and give your church a remainder interest that beginsupon your death. Perissa luxury hotelsAn undivided part of your entire interest. This must consistof a part of every substantial interest or right you own in theproperty and must last as long as your interest in the propertylasts. Example. You contribute voting stock to a qualifiedorganization but keep the right to vote the stock. The right to voteis a substantial right in the stock. You have not contributed anundivided part of your entire interest and cannot deduct yourcontribution. A partial interest that would be deductible if transferredin trust. A qualified conservation contribution (defined underQualified conservation contribution in Publication 561). For information about how to figure the value of a contribution ofa partial interest in property, see Partial Interest in PropertyNot in Trust in Publication 561. Future interest in tangible personal property.You can deduct the value of a charitable contribution of a futureinterest in tangible personal property only after all interveninginterests in and rights to the actual possession or enjoyment of theproperty have either expired or been turned over to someone other thanyourself, a related person, or a related organization. Related persons include your spouse, children, grandchildren,brothers, sisters, and parents. Related organizations may include apartnership or corporation that you have an interest in, or an estateor trust that you have a connection with. Tangible personal property.This is any property, other than land or buildings, that can beseen or touched. It includes furniture, books, jewelry, paintings, andcars. Future interest.This is any interest that is to begin at some future time,regardless of whether it is designated as a future interest understate law. Example.You own an antique car that you contribute to a museum. You give upownership, but retain the right to keep the car in your garage withyour personal collection. Since you keep an interest in the property,you cannot deduct the contribution. If you turn the car over to themuseum in a later year, giving up all rights to its use, possession,and enjoyment, you can take a deduction for the contribution in thatlater year. Inventory.If you contribute inventory (property that you sell in the courseof your business), the amount you can claim as a contributiondeduction is the smaller of its fair market value on the day youcontributed it or its basis. The basis of donated inventory is anycost incurred for the inventory in an earlier year that you wouldotherwise include in your opening inventory for the year of thecontribution. You must remove the amount of your contributiondeduction from your opening inventory. It is not part of the cost ofgoods sold. If the cost of donated inventory is not included in your openinginventory, the inventory's basis is zero and you cannot claim acharitable contribution deduction. Treat the inventory's cost as youwould ordinarily treat it under your method of accounting. Forexample, include the purchase price of inventory bought and donated inthe same year in the cost of goods sold for that year. DeterminingFair Market Value This section discusses general guidelines for determining the fairmarket value of various types of donated property. Publication 561contains a more complete discussion. Fair market value is the price at which property would change handsbetween a willing buyer and a willing seller, neither having to buy orsell, and both having reasonable knowledge of all the relevant facts. Used clothing.The fair market value of used clothing and other personal items isusually far less than the price you paid for them. There are no fixedformulas or methods for finding the value of items of clothing. You should claim as the value the price that buyers of used itemsactually pay in used clothing stores, such as consignment or thriftshops. Household goods.The fair market value of used household goods, such as furniture,appliances, and linens, is usually much lower than the price paid whennew. These items may have little or no market value because they arein a worn condition, out of style, or no longer useful. For thesereasons, formulas (such as using a percentage of the cost to buy a newreplacement item) are not acceptable in determining value. You should support your valuation with photographs, canceledchecks, receipts from your purchase of the items, or other evidence.Magazine or newspaper articles and photographs that describe the itemsand statements by the recipients of the items are also useful. Do notinclude any of this evidence with your tax return. If the property is valuable because it is old or unique, see thediscussion under Paintings, Antiques, and Other Objects of Artin Publication 561. Cars, boats, and aircraft.If you contribute a car, boat, or aircraft to a charitableorganization, you must determine its fair market value. Certain commercial firms and trade organizations publish guides,commonly called "blue books," containing complete dealer saleprices or dealer average prices for recent model years. The guides maybe published monthly or seasonally, and for different regions of thecountry. These guides also provide estimates for adjusting for unusualequipment, unusual mileage, and physical condition. The prices are not"official" and these publications are not considered an appraisalof any specific donated property. But they do provide clues for makingan appraisal and suggest relative prices for comparison with currentsales and offerings in your area. These publications are sometimes available from public libraries orfrom the loan officer at a bank, credit union, or finance company. Except for inexpensive small boats, the valuation of boats shouldbe based on an appraisal by a marine surveyor because the physicalcondition is critical to the value. Example.You donate your car to a local high school for use by studentsstudying automobile repair. Your credit union told you that the"blue book" value of the car is $1,600. However, your car needsextensive repairs and, after some checking, you find that you couldsell it for $750. You can deduct $750, the true fair marketvalue of the car, as a charitable contribution. Large quantities.If you contribute a large number of the same item, fair marketvalue is the price at which comparable numbers of the item are beingsold. Example.You purchase 500 bibles for $1,000. The person who sells them toyou says the retail value of these bibles is $3,000. If you contributethe bibles to a qualified organization, you can claim a deduction onlyfor the price at which similar numbers of the same bible are currentlybeing sold. Your charitable contribution is $1,000, unless you canshow that similar numbers of that bible were selling at a differentprice at the time of the contribution. Giving Property ThatHas Decreased in Value If you contribute property with a fair market value that is lessthan your basis in it, your deduction is limited to its fair marketvalue. You cannot claim a deduction for the difference between theproperty's basis and its fair market value. Your basisin property is generally what youpaid for it. If you need more information about basis, get Publication 551, Basis of Assets. You may want to get Publication 551if you contribute property that you: Received as a gift or inheritance, Used in a trade, business, or activity conducted for profit,or Claimed a casualty loss deduction for. Common examples of property that decreases in value includeclothing, furniture, appliances, and cars. Giving Property ThatHas Increased in Value If you contribute property with a fair market value that is morethan your basis in it, you may have to reduce the fair marketvalue by the amount of appreciation (increase in value) when youfigure your deduction. Your basis in property is generally what you paid for it. If youneed more information about basis, get Publication 551. Different rules apply to figuring your deduction, depending onwhether the property is: Ordinary income property, or Capital gain property. Ordinary Income Property Property is ordinary income property if its sale at fair marketvalue on the date it was contributed would have resulted in ordinaryincome or in short-term capital gain. Examples of ordinary incomeproperty are inventory, works of art created by the donor, manuscriptsprepared by the donor, and capital assets (defined later, underCapital Gain Property) held 1 year or less. Property used in a trade or business.Property used in a trade or business is considered ordinary incomeproperty to the extent of any gain that would have been treated asordinary income because of depreciation had the property been sold atits fair market value at the time of contribution. See Chapter 4 ofPublication 544, Sales and Other Dispositions of Assets,for the kinds of property to which this rule applies. Amount of deduction.The amount you can deduct for a contribution of ordinary incomeproperty is its fair market value less the amount thatwould be ordinary income or short-term capital gain if you sold theproperty for its fair market value. Generally, this rule limits thededuction to your basis in the property. Example.You donate stock that you held for 5 months to your church. Thefair market value of the stock on the day you donate it is $1,000, butyou paid only $800 (your basis). Because the $200 of appreciationwould be short-term capital gain if you sold the stock, your deductionis limited to $800 (fair market value less the appreciation). Exception.Do not reduce your charitable contribution if you include theordinary or capital gain income in your gross income in the same yearas the contribution. See Ordinary or capital gain income includedin gross income under Capital Gain Property later, ifyou need more information. Capital Gain Property Property is capital gain property if its sale at fair market valueon the date of the contribution would have resulted in long-termcapital gain. Capital gain property includes capital assets held morethan 1 year. Capital assets.Capital assets include most items of property that you own and usefor personal purposes or investment. Examples of capital assets arestocks, bonds, jewelry, coin or stamp collections, and cars orfurniture used for personal purposes. For purposes of figuring your charitable contribution, capitalassets also include certain real property and depreciable propertyused in your trade or business and, generally, held more than 1 year.(You may have to treat this property as partly ordinary incomeproperty and partly capital gain property.) Real property.Real property is land and generally anything that is built on,growing on, or attached to land. Depreciable property. Depreciable property is property used in business or held for theproduction of income and for which a depreciation deduction isallowed. For more information about what is a capital asset, see chapter 2of Publication 544. Amount of deduction - general rule.When figuring your deduction for a gift of capital gain property,you usually can use the fair market value of the gift. Exceptions.However, in certain situations, you must reduce the fairmarket value by any amount that would have been long-termcapital gain if you had sold the property for its fair market value.Generally, this means reducing the fair market value to the property'scost or other basis. You must do this if: The property (other than qualified appreciated stock) iscontributed to certain private nonoperating foundations, The contributed property is tangible personal property thatis put to an unrelated use by the charity, or You choose the 50% limit instead of the 30% limit, discussedlater. Contributions to private nonoperating foundations.The reduced deduction applies to contributions to all privatenonoperating foundations other than those qualifying for the 50%limit, discussed later. A special rule may apply to contributions of qualified appreciatedstock. Qualified appreciated stock is generally any stock of acorporation that is capital gain property and for which marketquotations are readily available on an established securities marketon the day of the contribution. See Internal Revenue Code section170(e)(5) if you contributed this type of stock. Contributions of tangible personal property.The term tangible personal property means any property, other thanland or buildings, that can be seen or touched. It includes furniture,books, jewelry, paintings, and cars. The term unrelated use means a use that is unrelatedto the exempt purpose or function of the charitable organization. Fora governmental unit, it means the use of the contributed property forother than exclusively public purposes. Example.If a painting contributed to an educational institution is used bythat organization for educational purposes by being placed in itslibrary for display and study by art students, the use is not anunrelated use. But if the painting is sold and the proceeds are usedby the organization for educational purposes, the use is an unrelateduse. Ordinary or capital gain income included in gross income. You do not reduce your charitable contribution if you include theordinary or capital gain income in your gross income in the same yearas the contribution. This may happen when you transfer installment ordiscount obligations or when you assign income to a charitableorganization. If you contribute an obligation received in a sale ofproperty that is reported under the installment method, seePublication 537, Installment Sales. Example.You donate an installment note to a qualified organization. Thenote has a fair market value of $10,000 and a basis to you of $7,000.As a result of the donation, you have a short-term capital gain of$3,000 ($10,000 - $7,000), which you include in your income forthe year. Your charitable contribution is $10,000. Bargain Sales A bargain sale of property to a qualified organization (a sale orexchange for less than the property's fair market value) is partly acharitable contribution and partly a sale or exchange. Part that is a sale or exchange.The part of the bargain sale that is a sale or exchange may resultin a taxable gain. For more information on determining the amount ofany taxable gain, see Bargain Sales as Gifts in chapter 1of Publication 544. Part that is a charitable contribution.Figure the amount of your charitable contribution in three steps. Step 1.Subtract the amount you received for the property from theproperty's fair market value at the time of sale. This gives you thefair market value of the contributed part. Step 2.Find the adjusted basis of the contributed part. It equals: Formula Step 3.Determine whether the amount of your charitable contribution is thefair market value of the contributed part (which you found in Step 1)or the adjusted basis of the contributed part (which you found in Step2). Generally, if the property sold was capital gain property, yourcharitable contribution is the fair market value of the contributedpart. If it was ordinary income property, your charitable contributionis the adjusted basis of the contributed part. See the ordinary incomeproperty and capital gain property rules (discussed earlier) for moreinformation. Example.You sell ordinary income property with a fair market value of$10,000 to a church for $2,000. Your basis is $4,000 and your adjustedgross income is $20,000. You make no other contributions during theyear. The fair market value of the contributed part of the property is$8,000 ($10,000 - $2,000). The adjusted basis of the contributedpart is $3,200 ($4,000 [$8,000 $10,000]).Because the property is ordinary income property, your charitablecontribution deduction is limited to the adjusted basis of thecontributed part. You can deduct $3,200. Penalty You may beliable for a penalty if you overstate the value or adjusted basis ofdonated property. 20% penalty.The penalty is 20% of the amount by which you underpaid your taxbecause of the overstatement, if: The value or adjusted basis claimed on your return is 200%or more of the correct amount, and You underpaid your tax by more than $5,000 because of theoverstatement. 40% penalty.The penalty is 40%, rather than 20%, if: The value or adjusted basis claimed on your return is 400%or more of the correct amount, and You underpaid your tax by more than $5,000 because of theoverstatement.