Gifts of Appreciated Property
A donor chooses to give property which is presently worth more than its original cost. This is called “appreciated property.”
The gift property must be held for more than 12 months or more to qualify as “long term” appreciated property.
The donor qualifies for an income tax charitable contribution deduction for its full fair market value at the time of the gift even though the original cost was less.
The donor also avoids any tax on the amount of the gain which would become due at the time of a sale of the property.
A prospective donor most often considers his/her immediate cash situation when making a gift.
Cash usually represents a small fraction of net worth thus severely limiting the potential for giving.
If the donor plans a gift his/her first consideration will be what to use to make a maximum gift at minimum net cost.
Most donors have among their assets something which is highly appreciated (see overhead on “Portfolios of the Wealthy” in Chapter 3). Assume that they have a parcel of real estate for which they presently have no particular use.
If they gift the property they receive an immediate contribution deduction for its full fair market value regardless of the original cost. They can deduct the gain from current income tax and completely avoid the gains tax that would be due when they sold the property. They would also avoid the effort and cost involved in the sale (listing, marketing, negotiating, and realtor fees) which now becomes the option of the charity.
They can make a larger gift realize maximum tax benefits; avoid the cost and effort of sale; remove the asset from their estate, and have the satisfaction of making the gift.
Therefore it is more economical to use appreciated property for gift purposes than it is to use cash. If the donor is reluctant to part with the property he/she could purchase it back at the prevailing market price. In that way the donor gets a new cost basis so that he/she will never pay a tax on the amount of gain on the property used to make the gift.