The deduction reduction rules are IRS regulations that require reduction of a donor's charitable deduction under certain circumstances.
Basic rule
The basic reduction rule requires that the deduction for a gift of property be reduced by the amount of capital gain that would not have been treated as long term capital gain if the donor had sold the property at its fair market value on the date of the gift. This type of property is collectively known as ordinary income property and includes short term capital gain property (property held 12 months or less), inventory, recapture property, and other ordinary income property.
The deduction for a gift of short term capital gain property, for example, is based on the donor's cost basis in the property. If a donor funds a gift annuity with $10,000 of appreciated stock that the donor purchased six months prior to the gift for $6,000, the donor's deduction will be based on $6,000, not $10,000.
Second reduction rule
Under certain conditions, a donor's charitable deduction must be reduced even when making a gift of long term appreciated property.
The deduction for a gift to a private foundation of long term appreciated property, other than publicly traded securities or capital assets, is based on the donor's cost basis in the property. Similarly, the deduction for a gift of tangible personal property, such as artwork or a coin collection, is based on the donor's cost basis in the property unless the property is used by the charity in a manner that is related to the charity's mission.
For example, a gift of artwork to an art museum that hangs the artwork in its galleries is deductible up to its full fair market value at the time of the gift. In contrast, a gift of the same artwork to the same museum that instead sells the artwork immediately is deductible only up to the donor's cost basis in the artwork.
This calculation can be created in our Planned Giving Manager (PGM) software. If you are a PGM license holder, see the Help section in the software for more details.
