Tax Deductions Related to Charity Auctions
- Purchase of Items at Charity Auction
- Auction Donor
- Appreciated Property
- Fair Market Value (FMV)
- Unrelated Use
- Contributions of “Use”
It is common practice for charities to hold auction events where attendees will bid upon and purchase items. The questions often arise whether (1) the money spent on the items purchased constitutes a charitable donation and (2) what kind of charitable deduction the individual who contributed the item is entitled to.
The answer to the first question is some, but not all, of what’s paid for the item may be deductible. 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 over its fair market value. Fair market value being the amount the item would sell for on the open market when the parties to the sale are aware of all the facts, are acting in their own interest, are free of any pressure to buy or sell, and have ample time to make the decision.
You must be able to show, however, that you knew that the value of the item was less than the amount you paid for it. For example, a charity may publish a catalog, given to each person who attends an auction, providing 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.
As to the second question, if you provide goods for a charity to sell at an auction, you may wonder if you are entitled to claim a fair market value charitable deduction for your contribution of appreciated property when the charity will later sell the item. Under these circumstances, the tax law limits your charitable deduction to your tax basis in the contributed property and 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 the sale raises money for the charity to use in its programs.
Another tax issue that is commonly encountered in a charity auction is when someone contributes the use of their second home or timeshare property. This may come as an unpleasant surprise, but the contributor is not entitled to a charitable deduction for donating the “use” or occupancy of a property. Such an arrangement does not constitute a gift of property. It is merely the granting of a privilege for which no charge is made. Thus, granting a charity the use of property does not constitute a charitable gift.
Example – Timeshare – Suppose a taxpayer contributes his or her timeshare week at a beach-front resort to a charity auction. There is no deductible charitable contribution since ownership of the timeshare unit was not given, only the use of the timeshare. Even the cleaning fee paid for the maid service when the winning bidder uses the unit would not be deductible since only expenses associated with services personally rendered by the taxpayer are deductible.
If you have questions related to charitable auctions or charitable contributions in general, please give this office a call.