Summer is the season when we receive the most questions regarding charity auctions and tax deductions. If you’re not already familiar with the practice, this is where charities to hold auction events. Attendees at these events bid on and purchase items on display. The items available to bid are usually donated to the charity holding the event.
The Two Most Asked Questions
- whether or not the money spent on the items purchased constitutes a charitable donation and
- what charitable deduction does the individual who contributed the item entitled to.
Charity Auctions and Tax Deductions Answers
Question #1
A portion of the price of the item could be deductible. But not all. So, if you purchase items at a charity auction, you may claim a charitable contribution deduction for the excess of the purchase price paid for the item. But only over its fair market value. (Fair market value being the amount the item would sell for on the open market.)
However, you must be able to show that you knew that the value of the item was less than the amount you paid for it. For example, the event may print out a catalog containing the description and value of every item for sale. Each person who attends the auction receives a copy of this catalog. The catalog may provide a good faith estimate of items that will be available for bidding. Assuming you have no reason to doubt the accuracy of the published estimate, if you pay more than the published value, the difference between the amount you paid and the published value may constitute a charitable contribution deduction.
Question #2
Say you provide goods for a charity to sell at an auction. Now you wonder if you are entitled to claim a fair market value charitable deduction for your contribution of appreciated property after the charity sells the item. Under these circumstances, the tax law limits your charitable deduction to your tax basis in the contributed property. It does not permit you to claim a fair market value charitable deduction for the contribution.
Specifically, the Treasury Regulations (Sec 170) provide that if a donor contributes tangible personal property to a charity that is put to an unrelated use, the donor’s contribution is limited to the donor’s tax basis in the contributed property. The term unrelated use means a use that is unrelated to the charity’s exempt purposes or function. The sale of an item is considered unrelated. Even if that said sale raises money for the charity to use in its programs.
Timeshare/Vacation Property Donation Question
Another tax issue commonly encountered in a charity auction is when someone contributes the use of their second home. This also goes for any donation of a timeshare property. In this case the contributor can not receive a charitable deduction for donating the “use” of a property. Such an arrangement does not constitute a gift of property. It only grants a privilege for which no charge is made. Thus, granting a charity the use of property does not constitute a charitable gift.
Example
A taxpayer contributes his/her timeshare week at a beach-front resort to a charity auction. There is no deductible charitable contribution in this case. Why? Because ownership of the timeshare unit was not given. In this case, only the use of the timeshare was donated. Even the cleaning fee paid for the maid service when the winning bidder uses the unit would not be deductible. This is because only expenses associated with services personally rendered by the taxpayer are deductible.
Planning to donate to a charity auction? If you have questions related to charitable auctions or charitable contributions in general, please give us a call.
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