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Monday May 30, 2016

Case of the Week

The Gas Guzzler's Deduction, Part 1

Case:

Brandon Bigtop loves his truck, which he affectionately named "the Beast." It was a gift for Brandon's eighteenth birthday. It is painted bright red and is two tons of metal, muscle and noise. Indeed, many neighbors would grumble as Brandon drove by because the rumbling engine could be heard three blocks away. As you can imagine, eighteen-year-old Brandon was in truck heaven.

Brandon is now twenty years older and a university professor, but he never could part with his beloved truck. So, the Beast now sits quietly in the driveway collecting dust and serving as merely an "eyesore" according to his wife. Every once in a while, Brandon will take the truck out for a spin but at nine miles per gallon, it is a costly joy ride. Plus, Brandon still gets the glares from neighbors as he passes through the neighborhood, something he does not relish anymore.

After much deliberation regarding what to do with the Beast, Brandon decides to give his truck to a local charity. It is time to part ways with his old childhood companion. Before deciding to contribute the truck to charity, Brandon checked with his tax advisor regarding the tax benefits of his gift. Brandon wanted to make sure he received the maximum tax benefit from his gift while at the same time not risking an IRS challenge to his gift.

Question:

What are the tax rules for gifts of automobiles? The local charity plans to sell the truck immediately after receipt. Does this affect Brandon's charitable deduction in any way?

Solution:

In general, gifts of vehicles produce a charitable deduction equal to the fair market value of the vehicle. Because vehicles usually lose value over time, the traditional "reduction" rules for gifts of tangible personal property generally do not apply to gifts of vehicles. See GiftLaw Pro Chapter 1.1.4. So, for many years, donors would simply claim a charitable deduction equal to a vehicle's "Blue Book" value. However, research by the IRS has showed that many donors claimed inflated values for their vehicle gifts. For instance, many donors claimed Blue Book value although their vehicle was in poor condition and actually sold for far less than Blue Book value.

As a result, the American Jobs Creation Act of 2004 created rules for charitable contributions of cars, boats, RVs and aircraft. There are two categories for these rules.

First category: If the charity sells the vehicle within 30 days, the "sale" category rules apply. Under the sale category rules, the receipt to the donor must list the name and Social Security number of the donor, the vehicle identification number and must also state that the vehicle was sold "in an arms-length transaction between unrelated parties." The receipt must also show the gross proceeds of the sale plus state that the charitable deduction may not exceed the gross proceeds.

This law basically provides that all gifts of vehicles that are sold will have a charitable deduction limited to the proceeds received by the charity. Since many charities sell vehicles at auctions where the prices are usually below Blue Book, the deduction for gifts of vehicles will be greatly reduced.

In this case, Brandon's truck has a Blue Book value of $4,000. However, at auction, the charity will likely receive between $2,000-$2,200. Therefore, under the rules, Brandon's charitable deduction will equal the gross proceeds from the charity's sale, i.e. $2,000-$2,200.

Editor's Note: In Part 2, we will address the second category of these rules - the "hold" category.

Published May 27, 2016

Previous Articles

Exit Strategies for Real Estate Investors, Part 17 - The Double Deferral Solution

Exit Strategies for Real Estate Investors, Part 16

Exit Strategies for Real Estate Investors, Part 15

Exit Strategies for Real Estate Investors, Part 14

Exit Strategies for Real Estate Investors, Part 13

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