The Art Of Donating Art
By Joy Berus
A charitable contribution is voluntary and is made without getting, or expecting to get, anything of equal value. However, donating art, antiques and other collectible objects to appropriate qualified organizations may provide you with possible benefits such as:
- An immediate income tax deduction
- Avoidance of the tax on capital gains on appreciated assets
- An estate and gift tax deduction
- The creation of a lasting legacy with their organization of choice
Here are twelve steps to consider when you are making a decision as to whether or not you should make a charitable contribution of artwork or other such tangible personal property objects, including what to donate, the different ways to donate, and the process of making a qualified charitable contribution.
Step #1: Donate Appreciated Objects
You generally will receive a higher income tax deduction if you donate an art object or collection that has appreciated in value over the time you have owned it. This is called capital gain property. Capital gain property includes capital assets you have owned for more than one (1) year. The general rule is that you can usually deduct the full fair market value of the donation as of the date of the contribution.
Step #2: Donate Long-Term Capital Gain Objects, Not Ordinary Income Objects
On the other hand, the amount you can deduct for a contribution of ordinary income property is generally only your basis in the property (your cost), not the full fair market value when you donated it.
Examples of ordinary income property are:
- Business inventory items
- Works of art created by the donor artist
- Manuscripts prepared by the donor author
- Capital assets held one (1) year or less
Unfortunately, the donor cannot be the artist, author, or creator of the object, or his direct heirs.
Step # 3: Donate to a Public Charity
In order to maximize your charitable deduction benefits, the qualified organization must be a public, not private, charitable organization. You should ask the organization whether it is a qualified public non profit organization, and most will be able to tell you (preferably in writing). Or, you can check IRS Publication 78, which lists most qualified organizations.
Step #4: Make Sure the Public Charity Meets the "Related Use Rule"
Meeting Step #3's public charity requirement is not enough to achieve you full fair market value tax deduction. The "related use rule" must also be met.
This means that the donated object must be of a type normally retained and exhibited by that charitable organization, such as a museum or educational institution that normally has a collection of similar paintings, or silver, or sports memorabilia as its non profit purpose. All of the appreciated value of the donated art object will be lost as a charitable deduction if the related use rule is not satisfied.
Step # 5: Verify Acceptance of the Donation by the Qualified Organization
Make sure your designated public charity wants the object! The contemplated donation should be discussed with the designated charitable institution. The organization should provide a written acceptance indicating that the organization is a qualified public charity, and that it satisfies the related use rule regarding the particular donation.
Step #6: Consider a Donation of a Partial (Fractional) Interest in the Artwork or Collection over Time (Caveat: The Benefits have been reduced by the Pension Protection Act)
Before the Pension Protection Act
In certain circumstances, a gift of a partial interest (referred to as an "undivided fractional interest") in a work of art or collectible was desirable to a donor. The allowable deduction under section 170(a) was equal to that value which bears the same ratio to the value of the entire interest that the donated undivided present interest in the art object bears to the entire interest therein." Rev. Rule. 57-293.
What this meant is that the second, third, fourth, etc. donations of additional fractional interests in the artwork often had a higher fair market value at the time of each fractional donation, not only because the value had increased over the passage of time, but also because the provenance of the object, such as museum exhibition(s), increased the value.
After the Pension Protection Act
The Act created new limitations on the donation of fractional interests after August 17, 2006. Now, once a fractional gift is made, the value of any subsequent gifts is limited to the LESSER of the initial FMV contribution or the later FMV contribution. In other words, if the value of the item goes down, the FMV deduction goes down, but if the value of the item goes up, the FMV does not go up, the donor is only entitled to the same value as the initial fractional interest contribution. Additionally, the gift must be completed within the earlier of 10 years or the death of the Taxpayer. This means that the donation of all fractions owned by the donor must be completed and donated within 10 years.
Step #7: Consider a Charitable Bargain Sale
The bargain sale is the only donation plan that can:
Give you both a lump sum of cash and a charitable tax deduction.
A bargain sale of artwork to a qualified charitable organization (a sale or exchange for less than the property's fair market value) is partly a charitable contribution and partly a sale or exchange. With the bargain sale, you sell your artwork or collection to the charitable organization at less than fair market value. Then the charitable income tax deduction would be the difference between what you received for the sale, and what you could have received had you sold it for its full fair market value.
Step # 8: Retain a Qualified Appraiser
The Pension Protection Act of 2006, and subsequent rulings, increased the requirements of a qualified art and collectibles appraiser in charitable contributions. As a very brief general summary, a Qualified Appraiser is now an individual who must have met the following requirements: He or she must have earned an appraisal designation from recognized professional appraiser organization, or otherwise must have met certain minimum education and experience requirements, and have demonstrated verifiable education and experience in valuing specific type of property valued.
Additionally, the Qualifed Appraiser cannot be an "Excluded Individual." Basically, this means the appraiser cannot be biased, or have a financial interest in the object being appraised. An appraiser is "unqualified" as an "excluded individual" if the appraiser is, i) the donor of the property, or the taxpayer that claims the deduction, ii) the donee of the property, iii) a party to the transaction in which the donor acquired the property being appraised, unless the property is donated within 2 months of the date of acquisition and its appraised value does not exceed its acquisition price. (This applies to the person who sold, exchanged, or gave the property to the donor, or any person who acted as an agent for the transferor or donor in the transaction), iv) Any person employed by any of the above persons, v) Any person related to any of the above persons or married to a person related to any to any of the above persons, and vi) an appraiser who appraises regularly for a person in (1), (2), or (3), and who does not perform a majority of his or her appraisals made during his or her tax year for other persons.
Step # 9: Make Sure that You Receive a Qualified Appraisal Report
Make sure the charitable contribution appraisal report you are given is USPAP compliant, and meets the additional IRS requirements. The appraisal report itself must be conducted by qualified appraiser in accordance with generally accepted appraisal standards. The minimum requirements, or "standard of care," for art, antique and collectible appraisal reports is USPAP, the Uniform Standards of Professional Appraisal Practice. Under IRS Notice 2006-96, the IRS recognizes this standard, "...The Appraisal will be treated as satisfying generally accepted appraisal standards if, for example, the appraisal is consistent with substance and principles of USPAP." Additionally, the appraiser must also be aware of the extra IRS requirements for charitable contribution appraisal reports that are required in addition to the USPAP requirements.
The Appraisal Report and IRS Form 8283
Contributions of art objects and other personal property are reported on IRS Form 8283, Section A, for all contributions for the year over $500.00.
For deductions of art objects and other personal property over $5,000.00, Form 8283 Section B must be completed, and the donor must also obtain a separate qualified written appraisal.
For deductions of art objects and other personal property over $20,000.00, Form 8283 Section B must be completed, and the donor must also obtain a separate qualified written appraisal, and this appraisal must be attached to Form 8283 when it is submitted to the IRS.
Step #10: The Required Time of Receipt of the Appraisal
You, as the donor, must receive the qualified appraisal report before the due date, including extensions, of the tax return on which the charitable contribution deduction is first claimed for the donated property. If this deadline is not met, your entire charitable tax deduction is lost.
Step #11: Consider Requesting a Statement of Value if the Donated Artwork or Collectible has been Appraised at $50,000.00 or More
If you are considering donating an object of art that has been appraised at $50,000.00 or more, you may want to consider requesting a Statement of Value from the IRS. At your request as the donor, the IRS will issue a Statement of Value that you can rely on, thus avoiding any future audit and penalty concerns.
You must request the Statement of Value after your donation has been made (this is not designed to be used as a fishing expedition), but before filing the tax return that reports the donation. The request must include a copy of the qualified appraisal of the artwork(s), the completed Form 8283 including Section B, and the $2,500.00 fee. (This fee is for 1 - 3 items, add $250.00 for each additional item over 3.)
Step #12: Consider Obtaining the Advice and Assistance of Attorneys, CPAs, Qualified Appraisers and other Professionals Experienced in Donations and Other Transactions Involving Art, Antiques, and Collectibles
These twelve steps are a summary of the general examples of some of the issues to be aware of when which you consider donating artwork to a charitable organization. There may be many other options available to you as a collector which may maximize your charitable deductions benefits.
To insure that all requirements for a qualified charitable contribution of art and other collectibles are met, a team approach is necessary. A team approach assists you and the professionals assisting you in maximizing your ability to make the appropriate charitable contribution decisions, and then can assist in the actual contribution transaction as required by law so that you, as the donor, will obtain the full fair market value tax deduction to which you are entitled.
Joy Berus is an attorney whose practice is devoted to art law. She provides collectors and their professional advisors assistance in both lifetime and estate planning transactions, including the management of art, antiques and collectible assets. She is a speaker and author of numerous articles on art as an asset, and has been published/quoted in CBS Marketwatch, Investors Business Daily, Forbes and CCH's The Journal of Practical Estate Planning.