Q:

Kerry:

I have a tax question for you.  I met a tax professional, we were discussing charitable gifts of fully-depreciated property.

He indicated that if a person had given an apartment complex (that was fully depreciated) to a charity as an outright gift (not retaining a life income), the donor would have to recapture the depreciation on his tax return (count as income) then deduct the FMV of the property on Schedule A.  He told me that he knows this because he researched it for a client last year.

I have always heard that such gifts would not require recapture to the donor, since they are not receiving anything in exchange for the gift (except a charitable deduction).  Because recapture would not be required, the charitable deduction would be reduced by any amount of ordinary income (depreciation subject to recapture) had the property been sold.

So, there would be no taxable income to the donor, but a reduced charitable deduction.

If you have time, I would like to know if I am correct or not (or if the tax pro is correct).  Thank you for any advice you could give me.

A:

It doesn’t work quite that way.  The amount claimed on Schedule A for the gift does have to be reduced by the amount that would have been reported as ordinary income or short term capital gain.  However, that amount does not have to be actually reported as income.

I confirmed this with my two main reference sources, Page 5-12 of the 2004 1040 QuickFinder Handbook and Paragraph 4119 of the Kleinrock Total Tax Guide, which I quote here.

4119 Reduction of Amount of Contribution for Certain Appreciated Property

In the case of contributions of appreciated property (i.e., property with a FMV in excess of the taxpayer’s basis), deducting the FMV of the contributed property is especially beneficial because the contribution ordinarily is not a recognition event, and the taxpayer does not recognize the gain inherent in the property. To prevent abuse, the taxpayer must reduce the deductible amount of a charitable contribution by the amount of gain (other than long-term capital gain) that would have been recognized if the property had been sold at FMV at the time of the contribution. §170(e)(1)(A). This rule requires a reduction for both ordinary income and short-term capital gain.

A similar rule requires a reduction for the amount of long-term capital gain that would be recognized if the contributed property had been sold for its FMV at the time of the contribution. However, unlike the rule for gain other than long-term capital gain, this rule applies only in three situations: (1) if the property is contributed to certain private non-operating foundations; (2) if the property contributed is tangible personal property and the charity’s use of the property is unrelated to its tax-exempt purpose; or (3) if the taxpayer elects to reduce the FMV by the amount of capital gain. §170(e)(1)(B).

In addition, contributions or gifts of capital gain property are subject to special percentage limitations. An individual’s deductible contributions of capital gain property to public charities are limited to 30 percent of the contribution base (§170(b)(1)(C)) and contributions of capital gain property to a charity other than a public charity may not exceed 20 percent of the individual’s contribution base. §170(b)(1)(D).

I hope this helps.

Kerry Kerstetter

 

I have noticed a lot of confusion among clients as to the expiration dates of the extensions we filed in April for 2004 tax returns.  The extension (4868) for the individual income tax return (1040) doesn’t expire until August 15, at which time Form 2688 can be filed to request two more months time.

It is different for pass-through entities, such as partnerships (1065) and trusts (1041).  In some twisted kind of government logic, even though these tax returns usually have their figures end up on 1040s, the first extensions that were filed in April (8736) only last for three months, expiring on July 15.  Another three months time can be obtained by filing two copies of Form 8800 with IRS by July 15.  The approved copy is then supposed to be sent back to you or your designated preparer.  This extends the due date to October 17.  The 15th is a Saturday.  I just finished preparing about 20 of them last night, which Sherry is now taking to the post office.   

Extensions for one kind of pass-through entity, S corporations (1120S), don’t expire on July 15.  The 7004 was due in by March 15 and was good for six months, just as it is for regular C corporations (1120), setting the due date as September 15.

Back during the debate over Bush’s tax cuts, the Dems were petrified that lower rates would stimulate the economy and help out the GOP. Contrary to the outright lies by the Left and just as happened with Reagan’s cuts, the lower rates have increased tax revenues. That is no surprise to those of us who understand true market forces and haven’t fallen for leftist propaganda.

Of course, Queen Hillary and her fellow JackAsses can’t resist the urge to continue their class warfare attacks on the tax cuts. Their only hope for any political success is to do as much damage to the economy as they can in order to then blame it on Bush.

Banks Open Doors To Illegal Immigrants – Anyone who has had to jump through the various hoops to obtain a mortgage from a bank should be spitting mad that our own government is actually making it easier for ILLEGAL aliens to get home loans.  This falls into the same insane category as what many of the states are doing, allowing ILLEGAL aliens to to have free or severely reduced tuition for state colleges; lower than what is charged for LEGAL taxpaying citizens. 

We have gone through the looking glass when ILLEGAL behavior is so rewarded by our rulers. The obvious answer to this flagrant abuse of power by our rulers is to vote them out of office.  Unfortunately, that is only going to become more difficult, as they continue to expand the abilities of ILLEGAL immigrants to vote.

States Move To Beef Up Estate Taxes – Another big reason why where you establish your official tax home is important.

Find the Right Tax Mix – Good look by Gail Buckner at how to factor taxes into retirement withdrawals.