Q:

Kerry:

I have a tax question for you.  I met a tax professional, we were discussing charitable gifts of fully-depreciated property.

He indicated that if a person had given an apartment complex (that was fully depreciated) to a charity as an outright gift (not retaining a life income), the donor would have to recapture the depreciation on his tax return (count as income) then deduct the FMV of the property on Schedule A.  He told me that he knows this because he researched it for a client last year.

I have always heard that such gifts would not require recapture to the donor, since they are not receiving anything in exchange for the gift (except a charitable deduction).  Because recapture would not be required, the charitable deduction would be reduced by any amount of ordinary income (depreciation subject to recapture) had the property been sold.

So, there would be no taxable income to the donor, but a reduced charitable deduction.

If you have time, I would like to know if I am correct or not (or if the tax pro is correct).  Thank you for any advice you could give me.

A:

It doesn't work quite that way.  The amount claimed on Schedule A for the gift does have to be reduced by the amount that would have been reported as ordinary income or short term capital gain.  However, that amount does not have to be actually reported as income.

I confirmed this with my two main reference sources, Page 5-12 of the 2004 1040 QuickFinder Handbook and Paragraph 4119 of the Kleinrock Total Tax Guide, which I quote here.


4119 Reduction of Amount of Contribution for Certain Appreciated Property

In the case of contributions of appreciated property (i.e., property with a FMV in excess of the taxpayer’s basis), deducting the FMV of the contributed property is especially beneficial because the contribution ordinarily is not a recognition event, and the taxpayer does not recognize the gain inherent in the property. To prevent abuse, the taxpayer must reduce the deductible amount of a charitable contribution by the amount of gain (other than long-term capital gain) that would have been recognized if the property had been sold at FMV at the time of the contribution. §170(e)(1)(A). This rule requires a reduction for both ordinary income and short-term capital gain.

A similar rule requires a reduction for the amount of long-term capital gain that would be recognized if the contributed property had been sold for its FMV at the time of the contribution. However, unlike the rule for gain other than long-term capital gain, this rule applies only in three situations: (1) if the property is contributed to certain private non-operating foundations; (2) if the property contributed is tangible personal property and the charity’s use of the property is unrelated to its tax-exempt purpose; or (3) if the taxpayer elects to reduce the FMV by the amount of capital gain. §170(e)(1)(B).

In addition, contributions or gifts of capital gain property are subject to special percentage limitations. An individual’s deductible contributions of capital gain property to public charities are limited to 30 percent of the contribution base (§170(b)(1)(C)) and contributions of capital gain property to a charity other than a public charity may not exceed 20 percent of the individual’s contribution base. §170(b)(1)(D).

I hope this helps.

Kerry Kerstetter

 

- posted by Kerry M. Kerstetter, MBA~CPA~ATP~ATA @ 7/15/2005 12:34:00 PM Send this post: