Gifts of Appreciated Assets Remain Attractive
Proposed tax bill keeps key benefits for donations of appreciated assets
November 28, 2017
By Bill Zook, Seattle Foundation Philanthropic Services
This is an unsettled season for charities, donors and their advisors as it’s increasingly likely that major tax law changes lie ahead. In particular, several current proposals would curtail or even eliminate the charitable income tax deduction.
Changing or removing the popular deduction would erode one of the primary benefits of charitable giving, but donors who make charitable contributions using appreciated assets would still have a meaningful tax incentive. There are two reasons for this:
• No tax on the capital gain is owed at the time of the gift – either by the donor or by the nonprofit – as long as the assets are transferred directly to the organization instead of being sold. The same result can also be achieved by transferring appreciated assets to a non-charitable recipient, such as a family member.
• When the nonprofit sells the contributed assets, its tax-exempt status becomes a significant advantage. It will pay no tax on the capital gain, whereas a non-charitable recipient will (although Subchapter S stock sold by a charity is an exception to the general rule). This enables the organization to apply the full value of the assets to its work.
Under existing law, the emphasis is on long-term appreciated assets, as contributing them to charity results both in avoiding capital gains tax and in securing a deduction for the full value of the assets (rather than for cost basis, which is the case with short-term appreciated assets). Take the deduction out of the picture and suddenly the long-term/short-term distinction is of no importance.
Significantly, avoiding capital gains tax effectively lowers the cost of a donor’s gift, compared to selling the assets and contributing the cash proceeds. Many donors are looking at a capital gains tax rate of 15 or 20 percent, with rates of 25 percent for gain resulting from depreciation on real estate, and 28 percent for gain on collectibles. Add to this the 3.8 percent tax on net investment income (when applicable), and the cost savings associated with charitable gifts of appreciated assets can exceed 30 cents on the dollar. Additionally, the charity then converts the asset to cash, streamlining the transaction for the donor.
Regardless of the shifting tax landscape, there’s no substitute for careful planning guided by knowledgeable advisors. Seattle Foundation welcomes every opportunity to share options with donors and work with their advisors to identify the best path forward.
For more information, contact Bill Zook, firstname.lastname@example.org, or Susan Peterson, email@example.com.