Question

Dorchester purchased investment realty in 2001 for $25,000. During the current year he contributes it to the American Heart Association to use as the site for its new local headquarters. The realty has a value of $52,000 on the contribution date, and Dorchester's AGI is $100,000. Dorchester's maximum current year contribution deduction is

	a.	$- 0 -
	b.	$25,000
	c.	$30,000
	d.	$50,000
	e.	$52,000

According to the test bank 2016, the answer is (c). Please explain. Thank you

Answer 1

Dorchester's maximum current year contribution deduction is $30,000

Working Note – 1 – Computation maximum current year contribution deduction

Given,

Cost of Purchase in 2001 = $25,000

Value on contribution date = $52,000

Dorchester's Adjusted gross income = $100,000

Computation maximum current year contribution deduction

1. Amount of deduction is least of the following,

a) Cost of investment realty = $25,000 or

b) 50% of Adjusted gross income ($100,000 x 50%) = $50,000

c) $25,000

                                         or

a) Fair market value the investment realty = $52,000 or

b) 50% of Adjusted gross income ($100,000 x 30%) = $30,000

c) $30,000

The Benefits of Donating Appreciated Real Estate

If a person donates investment realty to a non-profit organization, it qualifies for an income tax deduction equal to the fair market value or the cost basis of the property.

Amount of deduction

The amount of your deduction generally depends on whether the real estate is a short term (held one year or less) or a long-term asset (held more than one year).

Short-term assets

For short term assets, the deduction is equal to the lesser of the property's fair market value or its cost basis. The exception: This limitation applies to all donations to private foundations, even if the donated assets have been held long-term.

Long-term appreciated assets

There are two methods for valuation of deduction of Long-term appreciated assets.

a) The amount of deduction equal to the fair market value of the property limited to 30 percent of the donor's adjusted gross income (AGI).

b) Another method deduction is based on the cost of the long-term appreciated assets. The amount of deduction is equal to cost of the long-term appreciated assets limited to 50 percent of donor's adjusted gross income.