Important Tax Considerations
The tax benefits from making gifts of art can be generous, but the tax rules governing such gifts are complex. When planned carefully, donors who contribute artworks to certain tax exempt organizations during their lifetime avoid paying capital gain taxes and benefit from an immediate income tax deduction for the full fair market value of the donated artworks.
A brief summary of the tax rules is provided below. This summary is for informational purposes only and does not provide specific legal advice. While KBFUS will be happy to help you identify legal and tax issues relating to your gift of artwork, we encourage you to consult with your own legal advisor as to how the tax rules described below apply to your specific circumstances.
Selecting an appropriate beneficiary organization
When making a charitable gift of art, a donor may be eligible to receive an income tax deduction for the contributed item. However, such a charitable deduction is only available for gifts made to nonprofit, charitable or cultural institutions organized in the United States, such as KBFUS. No deduction is allowed for lifetime gifts made directly to institutions formed abroad.
Donating capital gain vs. ordinary income property
If a work of art is held by its owner for more than one year, it is generally considered capital gain property. In such cases, the donor could be able to deduct the full fair market value of the donation. On the other hand, art will be considered ordinary income property if it was (i) owned by the donor for one year or less; (ii) created by the donor; (iii) received by the donor as a gift from the creator; or (iv) held as inventory by an art dealer. The tax deduction will then generally be limited to the cost basis – i.e. what the donor paid to acquire or create the artwork.
Meeting the related use rule
If the artwork that is contributed is long-term capital gain property, the donor would qualify for a charitable contribution deduction equal to the fair market value of the artwork but only if the beneficiary organization will use the artwork in a manner that is consistent with its exempt purpose for at least three years. This “related use rule” is not met if, for example, the recipient chooses to sell the artwork to produce funds to cover operating expenses. If the “related use rule” is not met, the donor’s deduction will be limited to the lesser of the fair market value and the donor’s cost basis.
Establishing the value of the donated artwork
If a donor intends to claim a deduction of more than $5,000, the donor must obtain a qualified written appraisal of the artwork. The appraisal must be prepared by a person who has earned an appraisal designation from a recognized professional appraiser organization for competency in valuing artworks, can demonstrate education and experience in valuing artworks, and regularly performs appraisals of artworks for which he or she receives compensation.
Among other things, the appraisal must: (1) identify the artwork in sufficient detail to assure that the appraised artwork is the artwork to be contributed; (2) describe the physical condition of the artwork; (3) state the date (or expected date) of contribution of the artwork; and (4) state that the appraisal was conducted in accordance with generally accepted appraisal standards.
The appraisal may not be performed more than 60 days before the artwork is contributed. The donor, and only the donor, bears the responsibility for establishing the value of the donated artwork. KBFUS will neither participate in the valuation process nor express agreement with the appraised value.
Claiming an income tax deduction
Charitable contributions of artworks are reported on IRS Form 8283, which should be filed with the donor’s tax return. If a donor claims a deduction of more than $5,000 but less than $20,000, the donor must complete the appraisal summary on Form 8283. Form 8283 should also be signed by both the appraiser and the recipient organization. If a donor claims a deduction of $20,000 or more, the donor must attach a complete copy of the signed, written appraisal to his or her tax return. For donations of artworks appraised at $50,000 or more, the donor can request a “statement of value” from the IRS before filing his or her tax return.
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