IRS Rules for Gifts of Art - Some Basics

A gift of art to charity can be a mutually rewarding gift for the charity and the donor. However, there are numerous IRS rules that must be closely followed by the donor to protect and maximize his tax benefits. While the gift planning office should always counsel the donor to obtain his own advisor in such situations, an understanding of the basic IRS rules for gifts of art can assist in the process.  

Gift Acceptance Committee

While not an IRS rule, the charity should have a gift acceptance committee review the proposed gift before acceptance. Is the gift related to the mission of the charity and does the charity intend to put the art to a related use? Is the charity going to immediately sell the art and use the cash in its mission? The decision of the gift acceptance committee to keep and display the art or convert it to cash has tax implications for the donor.

Related Use

To claim a fair market value deduction, the donated artwork must be “related” to the mission of the charity. The clearest example of related use is a painting donated to an art museum for display in its collection. A related use would also be artwork donated to a university for display in its museum or use in the classroom for educational purposes. However, a gift of a painting to a food bank would likely not be considered a related use. If the art is sold and converted to cash, the charitable deduction is limited to what effectively is the cost basis.

Donor’s Status – Investor, Collector, Artist, or Dealer?

In addition to the related use rules, deductibility of gifts of art vary depending on the donor’s ownership of the art. To deduct fair market value an art donor must be either an “investor” who purchases art for investment purposes, or a “collector” who purchases art for personal use and pleasure. An art dealer is one who buys and sells art as a trade or business. Art in the hands of a dealer is considered inventory. If the donor is a dealer or the artist who created the donated piece, the charitable deduction will be limited to the lesser of fair market value or cost basis.

Holding Period by the Charity

If the charity sells the donated art within three years of the gift, the charity must file a Form 8282. Sale of the art in this period means it did not meet the related-use requirement and is not entitled to a fair market value deduction. Upon such a sale, the donor is likely to have to amend their tax return limiting their deduction to the lesser of fair market value or cost basis.

Qualified Appraisal

If the donor wishes to take a charitable deduction in excess of $5,000, the donor must obtain a qualified appraisal of the work of art performed by a qualified appraiser to be reported on Form 8283. The qualified appraisal must contain a description of the property, the condition, the method used for valuation, the name of the artist and date created just to name a few criteria required by the IRS. The qualified appraiser must meet professional and educational requirements set out by the IRS. If the donor’s total deduction for art is $20,000 or more, the appraisal must also be attached to the tax return.  Items of art with a claimed value of $50,000 or more may be referred to the IRS Art Appraisal Services for possible review by the Commissioner's Art Advisory Panel. Details of the process are found in IRS Publication 561, Determining the Value of Donated Property.

Charitable Deduction

Donors who are investors or collectors can take an income tax charitable deduction for the fair market value of the donated artwork if they have:

1. Owned the donated art for at least one year
2. Complied with the IRS requirements for a qualified appraisal
3. Donated the art to a public charity that will use the art related to its mission for at least three years following the gift

These donors’ deduction cannot exceed 30% of the donor’s adjusted gross income in the year of the gift, with an additional five years to take any unused charitable deduction subject to the same 30% limitation each year.

If the donor of the art is either the creator of the art or a dealer in art or has only owned the donated art for less than one year, the charitable deduction is limited to the lesser of the fair market value or cost basis. The donor can deduct up to 50% of their adjusted gross income in the year of the gift, with a five year carry-forward for any unused deduction.

In either case, the donor must file IRS Form 8283 with the completed appraisal summary in Section B along with their federal income tax return. 

Substantiation

If the donor is claiming a tax deduction for a gift of $250 or more the donor must receive a contemporaneous written acknowledgment stating the name of the donee organization, a description (but not the value) of non-cash (i.e. the artwork) contributed, and a statement that no goods or services were provided by the organization, if that was the case. Failure to have such acknowledgment will enable IRS to deny the charitable deduction claimed by the donor.

Use of an Advisor

Donors should consult a tax advisor with expertise in charitable gifts of art, and the donee charity should give the donor such advice - in writing. IRS can be rigid in enforcing their rules around such gifts. However, ask any museum curator or university art educator and they will confirm that gifts of art enhance the experience of their constituency.