Question: I bought a painting for $1,000 at a charity auction. I think the painting might be worth about $300. How much can I deduct as a charitable contribution?
Answer: Ordinarily, when an individual makes a cash contribution to a qualified charity, the individual is entitled to a charitable contribution deduction equal to the amount contributed, up to certain limits based on the donor’s income. However, when a donor receives more than an “insubstantial benefit” in return for a payment to a charity, he or she cannot deduct the value of the return benefit.
This means, reasonably enough, that you cannot claim a charitable contribution deduction for the full price you paid for the painting, since a portion of the $1,000 you paid is considered to be the purchase price for the painting, rather than a gift to the charity.
Because you paid more than $75 for the painting, the law requires the charity to provide a written statement to you, containing a good faith estimate of the fair market value of the painting. This statement should also state that only the portion of your payment that exceeds the fair market value of the painting is deductible as a charitable contribution.
So far so good. But in order to take a deduction, you will not only need to show that you paid more than the painting was worth, but that you did so knowingly, with the intent of making a charitable contribution. How do you demonstrate that you knew you were overpaying? A charity can help you meet this requirement with a little advance planning, such as by distributing a catalogue to each individual attending the auction prior to the commencement of the bidding, with the charity’s good faith estimate of the fair market value of each item to be auctioned.
Assuming that you can show that you knowingly paid more than the painting was worth, with the intent to make a charitable contribution, you will also need to maintain a reliable record of your contribution with your tax records. If the fair market value of the painting is $300, your real contribution is $700. The law requires that for contributions of $250 or more, donors must obtain a contemporaneous written acknowledgment from the donee charity that contains the total amount paid to the charity, a description of any goods and services provided in return, and a good faith estimate of the fair market value of such goods and services. You must obtain this statement no later than the due date for your original income tax return (or the date you actually file your original income tax return, if earlier). You must obtain this statement even if you received a catalogue prior to bidding at the auction, describing the items to be auctioned and their fair market values.
Question: I own a vacation home at the beach, which I rent out during the season. I donated a week’s stay at the house for a fundraising auction conducted by a local charity. Ordinarily, the house rents for $2,000 a week. The winning bidder at the auction paid $2,500. How much can I write off as a charitable contribution?
Answer: Unfortunately, the short answer is, “nothing.” Individuals who contribute real or personal property to be sold at a fundraising auction by a charity generally are entitled to a charitable contribution deduction. However, with certain limited exceptions, no deduction is allowed for gifts of less than a donor’s complete “interest” in a piece of property. Your contribution of the right to use your beach house for a week is a contribution of a partial interest in property. Unfortunately, this means that your contribution is not deductible, regardless of the value of such use.
For what it’s worth, someone may get a deduction here. Just as with the $1,000 painting, the successful bidder may be entitled to a charitable contribution deduction if he can show that he knowingly paid more than fair market value for a week at your beach house, intending the difference to be a charitable contribution, and if he substantiates the contribution with a contemporaneous written acknowledgment from the charity.
V. Moore is a senior manager in the Exempt Organizations Tax Practice of KPMG LLP. For more information on the contents of this article or the services KPMG provides to charities and private foundations, please contact Mr. Moore at (202) 533-3084.
The above advice is intended to be general in nature. Consult your own tax and legal advisers to discuss endowed chairs before entering into a donor agreement.