A new tax rule for property donations

March 21, 2008

In January, I gave a local art school a $10,000 painting that I'd owned for five years. The school plans to display it so students can use it for reference, and I expected to deduct the painting's full market value on my tax return this year. But an art dealer I know says I may not be able to if the school sells the painting. Is he right?

In January, I gave a local art school a $10,000 painting that I'd owned for five years. The school plans to display it so students can use it for reference, and I expected to deduct the painting's full market value on my tax return this year. But an art dealer I know says I may not be able to if the school sells the painting. Is he right?

Yes. New rules apply to appreciated personal property owned for longer than a year and donated after Sept. 1, 2006. If the amount of the deduction tops $5,000 and the charity sells the property before the end of the year in which it was donated, the taxpayer can deduct only the property's cost basis, not the fair market value. You'd be able to get around that rule only if the charity certifies in writing that selling your painting supported its tax-exempt purpose, or that other circumstances forced it to sell. Even if the charity doesn't sell the painting this year, if it does so within three years of your donation date and it refuses to provide the required certification, you'll have to report the difference between the amount you deducted and your original cost basis as ordinary income.