Donating appreciated assets to charity: What you need to know

When you think about donating items to charity, you probably think of old clothes or household items. You can also donate appreciated assets, items that have increased in value, such as stocks and real estate. Donating appreciated assets may maximize the value of your gift and create an even greater financial impact on the communities and causes you care about.

Assets are investments or physical property that have value. Appreciated assets are those whose value has increased since you first acquired them. For example, a share of stock you paid $85 for that is now worth $110 has appreciated. A plot of land that you paid $250,000 for that is now worth $350,000 is also an appreciated asset.

The main advantage of donating appreciated assets is that it has the potential to reduce your taxes. Every tax dollar you save increases the value you are able to give to the charity, so it makes an even greater impact.

You can deduct charitable donations from your income up to certain limits established by the IRS. For example, you may donate $50,000 to charity, deduct it from your taxable income, and not have to pay taxes on that amount. This generally applies whether you donate $50,000 of cash or investments or other property worth $50,000. However, you need to be mindful of adjusted gross income (AGI) limitations, which depend on the type of donation you give and the type of organization you give it to.

The ability to deduct contributions includes donations made to a donor-advised fund (DAF). Think of a DAF as a tax-advantaged charitable investment account similar to the way an IRA works for your retirement savings. Contributions to a DAF are deductible while also letting you invest the money and allow it to grow tax-free.

You can then direct future payments from the assets. For example, you may donate $50,000 to the DAF today and claim the deduction for the present tax year, then make annual payments of $10,000 for each of the next five years from the assets (adjusted for investment growth and fees) to your chosen charity.

If you own appreciated assets, it's important to be aware of capital gain taxes. The increase in value of your assets over the price you originally paid (the appreciation) is a capital gain and will be subject to taxation if you sell the asset.

• If you've held the asset for less than one year, the gain is short-term and will be taxed as income at your marginal income rate.
• If you've held the asset for one year or more, the gain is long-term and will be taxed at either 0%, 15% or 20%, depending on your total amount of taxable income and tax filing status.

However, you may be able to avoid taxation on the gain altogether by donating the appreciated asset to charity directly. Thrivent does not provide tax advice, but the following hypothetical example can help you understand how it might work.

Suppose you own mutual funds worth $50,000 that you want to use to make your charitable donation. Further assume:

• Your cost basis (the price you originally paid for the fund) is only $30,000.
• You've owned the mutual funds for less than one year.
• Your marginal tax rate is 32%.

If you sell the mutual funds to donate the proceeds to charity, you'll owe 32% on the $20,000 gain. You will then owe $6,400 in taxes, leaving you with $43,600 to give to charity.

Donating mutual funds directly to charity instead allows you to bypass the capital gain and give the full value of $50,000. The charity can then choose to hold the mutual funds or sell them.

Donating appreciated securities to charity—as well as other types of appreciated noncash assets—can be an excellent component of your charitable giving and tax strategies. There may be special considerations, though, depending on the type of asset you choose to donate. Here are some common examples:

• Publicly traded securities like mutual funds, stocks and bonds can be sold by the charity to raise funds, or the organization can hold them for their potential to provide cash flows or additional growth.

• Restricted stock has not been registered or otherwise cannot be traded on public exchanges. Certain conditions must be met before you can donate your restricted stock and for the charity to sell it, as described in SEC Rule 144.

• Real estate needs to be appraised in order to determine the fair market value of the gift. If there is an outstanding debt on the property, then the charity may incur a tax liability on the income generated by the property, and the donor may be taxed on debt due to bargain sale rules.

• Privately held business interests, such as stock in an S-corporation, C-corporation, LLC or LP, often have a very low cost basis, making them ideal donation vehicles. You may need to obtain an appraisal to determine fair market value. It is important that the terms of any pending sale have not risen to the point of a prearranged sale before the donation occurred. Otherwise, you may still be liable for tax on the gain.

• Private equity fund interests might include limited partnership interests, portfolio company stock or special purpose vehicles. Charitable transfers of private equity fund interests are often quite complex and require planning, often with the involvement of a general partner. A qualified appraiser must determine the fair market value for tax deductibility. If the charity intends to hold the asset, perhaps due to sale restrictions, it may be necessary for the organization to conduct a due diligence review and agree to accept the gift.

• IPO stock has the potential to create significant capital gains that potentially make it a good option for donation. Lock-up periods, specified times in which the shares cannot be sold, often apply to IPO stock. Donation may or may not be prohibited during this time. You may also need to consider SEC Rule 144 restrictions.

• Cryptocurrency donations are not considered currency gifts. If you held it for investment purposes for longer than one year, then you are able to deduct the fair market value. If you received it as compensation or held it for less than one year, you can only deduct the lesser of your cost basis or the fair market value.

• Fine art and collectibles donations are subject to the related use rule: If the organization does not use the artwork for its charitable purpose, then your deduction is limited to the lesser of either your cost basis in the artwork or its fair market value. Artwork held longer than one year is considered a collectible and the maximum capital gain rate is 28% (not including 3.8% net investment income tax).

• Equity compensation awards like nonqualified stock options, incentive stock options, restricted stock awards and units are normally not eligible for donation. However, once you exercise the options or receive vested shares, then you can donate them to charity. Be mindful of holding period requirements. It's generally better to hold equity compensation for longer than one year after exercise or vesting to take full advantage of tax benefits.

Donating appreciated assets could be a valuable part of your giving strategy. A financial advisor can help you craft the best approach for you and your chosen charity. Connect with a Thrivent financial advisor to explore the different ways to make a charitable impact with your savings and the methods for doing so.