Taking a Charitable Deduction and Keeping the Property
Charitable Tax Deduction for Property You Don’t Give Away
Make a Donation and Still Keep the Property
If you want to help out your favorite charity, but you simply can’t afford to make a gift, consider this: You can make a gift of what the tax lawyers call a “fractional interest” in your property. Under this setup, you can support a good cause, get a big charitable deduction–and still hold onto your property.
A Practical Example
Example: Pretend you have an art collection worth $100,000. You want to use your collection to help out your pet charity, but you’re reluctant to hand over your prized possessions. You can donate what amounts to a “time share” of your collection. That way, you can continue to enjoy your artworks and get a big tax break to boot.
How The Deduction Works
How does this work? Let’s say you donate a 25% interest in the collection. Result: You get a current tax deduction equal to $25,000–25% of the $100,000 value of the collection. To get the deduction, you have to give the charity the right of possession for 25% of the time (three months per year). But the charity doesn’t have to enforce its right of possession during your lifetime. In fact, the charity may opt for this if you’re going to donate the remaining 75% interest in your will. If that’s the case, you continue to get full enjoyment of your collection, but you still get the charitable tax deduction. Why don’t you lose the deduction if the charity doesn’t take actual possession as it’s entitled to? Because the courts say so [Winokur, 90 T.C. No. 733].
More deductions: Let’s say your collection is appreciating in value each year. You can use this same fractional-interest donation idea to get a series of annual deductions equal to the yearly increase in value.
Let’s say your remaining 75% interest in your collection goes up in value next year from $75,000 to $80,000. You can donate an interest in the collection equal to the $5,000 increase in value, still leaving you with $75,000 worth of artworks. As the collection continues to increase in value, you can donate the increase each year. True, your ownership percentage drops, but you help yourself to a continuing stream of charitable tax deductions. And in the end, charity benefits.
More Tax Tips
Our Tax Site will give you many tips that you can use to lower the tax burden of you or your clients.
