Tax Rules When Donating Art
If you own a valuable piece of art or other property, you might be curious about the tax benefits of donating it to charity.
Because of the various tax laws that may apply to such contributions, the answer to that question can be complicated. If the charity's use of the work of art is unrelated to the purpose or function that qualifies it as a tax-exempt organization, the charitable donation of the work of art may be reduced. The reduction is the amount of capital gain you would have received if you had sold the property instead of donating it.
Your estate may be eligible for associated tax benefits if you opt to donate artwork to charity. However, there are several decisions to make and factors to consider when calculating which tax benefits you are eligible for.
The optimal time to begin planning and coordinating your charitable art donation is as early as possible in the fiscal year. Don't put off starting the procedure. Because of the IRS's time constraints, the end of the year can be a particularly hectic time for appraisers and other parties engaged in the gift process. Donations to museums and organizations frequently require numerous clearance levels — from committees, boards, trustees, and others — before they can be accepted. And it can take (a long) time to do so. It's better to start early rather than hurrying at the end of the year to ensure that you meet the deadline.
It's vital to speak with your preferred institution before naming it in your will or estate plan. Contact someone at the museum or institution where you want to give and make sure your collection matches their goal and values.
The IRS also has rules prohibiting the receiving institution from reselling the artwork within three years unless it is donated to another nonprofit. As a result, if the organization to which you donate sells the item at auction to a private individual in two years, your income taxes mght be affected. As a result, it's a good idea to include a clause in the donation agreement stating that the receiving institution will not sell the work for at least three years, especially if the contribution is over $5,000.
For all donations over $5,000, you'll need an official appraisal to determine the fair market worth of your collection.
If the value of your artwork (and the claimed deduction) exceeds $20,000, you must include the actual appraisal report with your IRS form reporting the deduction. The IRS has an art advisory council that is sometimes called in to verify whether or not an appraised value is accurate. Appraisals for estates may appear to be disproportionately low, whereas appraisals for income tax deductions may look to be higher than market value, resulting in an IRS panel audit.
This is why hiring an experienced advisor is crucial. Professional advisors are held to high ethical standards and provide an objective 3rd-party valuation that can safeguard you from an aggressive IRS audit.
To claim a charitable income tax deduction, you must satisfy many rules:
- You must make a donation to a public charity in the United States.
According to the IRS, donations to non-U.S. charities are not eligible for a charitable income tax deduction. However, you may be eligible to deduct a donation to a U.S. charity even if the organization intends to spend the funds in another country. Request a copy of the charity's exemption letter from the IRS to ensure that the organization you chose is based in the United States. You can also utilize the Exempt Organization Select Check, an online search tool provided by the IRS.
There is no requirement that a charity in the United States get an inheritance tax credit if you plan to donate art to charity after your death.
- You must have owned the piece for at least a year.
To be eligible for a tax deduction, artwork must be deemed long-term capital property. Don't buy a piece of art with the idea of donating it the same year to get a tax advantage. You must have owned work for more than one year to claim its current fair-market value as the value of the charitable deduction.
- You must be a true art investor or collector.
In order to claim a tax deduction, you must meet all of these requirements as well as fall under the IRS's definition of an art collector or investor. If you're an art dealer or an artist, you can't deduct artwork gifts for charitable purposes.