What Is a Gift in Kind? Valuation and Tax Rules

A gift in kind, often called an in-kind donation, represents a non-financial contribution made to a charitable organization. These gifts differ from monetary donations because they involve goods, services, or property rather than cash. Gifts in kind allow non-profits to acquire necessary resources without expending their financial reserves, which can then be reallocated to other operational needs. This form of giving is a popular way for individuals and businesses to support causes they care about.

Understanding Gifts in Kind

A gift in kind is a non-cash contribution of goods, services, or property to a qualified charitable organization. These donations are distinct from cash gifts because they involve tangible or intangible assets directly. Many different types of assets can be given as gifts in kind, providing flexibility for donors and recipients. Common examples include tangible goods like food, clothing, furniture, office equipment, and building materials. Real estate, such as land or buildings, and securities like stocks or bonds, also qualify as gifts in kind. Professional services, such as legal advice, accounting, web design, or consulting, are also considered in-kind donations, allowing organizations to benefit from specialized expertise they might otherwise need to pay for.

Determining the Value of Gifts in Kind

Establishing the value of gifts in kind is important for both the donor’s tax purposes and the recipient’s financial reporting. The general principle for valuing donated property is its fair market value (FMV) on the date of the contribution. Fair market value is defined as the price at which property would change hands between a willing buyer and a willing seller, with neither being compelled to buy or sell, and both having reasonable knowledge of relevant facts.

Valuation methods vary depending on the type of asset donated. For publicly traded securities, the fair market value is typically the average of the highest and lowest quoted selling prices on the date of the donation. Real estate valuation usually requires a professional appraisal, considering comparable sales in the local market.

For art, antiques, and collectibles, especially those valued over $5,000, a qualified appraisal by an independent expert is generally required to determine their fair market value. Vehicles can be valued using resources like pricing guides, but professional appraisals may be necessary for classic or unique cars. For inventory or business property donated by businesses, the valuation process considers the cost basis or the price at which comparable items are sold in similar quantities. It is important to note that the value of donated professional services, such as pro bono legal work or accounting, is generally not tax-deductible for the individual providing the service, although the organization receiving the service still benefits from its value.

Tax Implications for Donors

Donors of gifts in kind can often claim a tax deduction, but the rules depend on the type of property and the recipient organization. The fair market value of the donated property is generally the basis for the deduction. For property held for more than one year (long-term capital gain property), the donor can typically deduct the fair market value. However, if the property would result in ordinary income or short-term capital gain if sold (e.g., inventory or property held for less than a year), the deduction is usually limited to the donor’s cost basis.

Adjusted Gross Income (AGI) limitations apply to non-cash contributions. For donations to most public charities, the deduction for non-cash contributions is typically limited to 30% of the donor’s AGI. If the contribution exceeds this limit, the excess can generally be carried forward and deducted in the subsequent five tax years.

The “related use” rule is particularly relevant for donations of tangible personal property, such as art or collectibles. If the charity uses the donated property in a way that is related to its exempt purpose, the donor can deduct the fair market value. For example, donating a painting to an art museum that displays it would be a related use. If the use is unrelated, such as donating a painting to a charity that sells it immediately, the deduction is typically limited to the donor’s cost basis.

Tax Implications for Recipients

Non-profit organizations receiving gifts in kind generally do not pay tax on these contributions because they are considered charitable donations. Recording the fair market value of received goods or services is a standard practice for the non-profit’s financial statements.

Recipients must provide a written acknowledgment to the donor for any single contribution of $250 or more. This acknowledgment should include the organization’s name, a description of the non-cash contribution, and a statement indicating whether any goods or services were provided in return for the donation. The acknowledgment should not state the value of the non-cash gift, as it is the donor’s responsibility to determine the value for tax purposes. If the non-profit provides goods or services in return for a contribution exceeding $75, it must issue a written disclosure statement estimating the value of those goods or services.

In some cases, if a non-profit uses a donated item in a way that generates income unrelated to its tax-exempt mission, this could potentially lead to unrelated business taxable income (UBTI). This is generally not a concern for most gifts in kind used directly to further the organization’s charitable purpose.

Record Keeping for Gifts in Kind

For donors, it is necessary to maintain a written acknowledgment from the charitable organization for any non-cash contribution of $250 or more. This acknowledgment should describe the donated property and confirm whether any goods or services were received in return. Donors should also keep detailed records of how they determined the fair market value of the donated property, including any qualified appraisals. Records of the original cost basis of the property and the date it was acquired are also important. For non-cash contributions where the total deduction claimed is more than $500, donors must file Form 8283, Noncash Charitable Contributions, with their tax return.

Recipient organizations should maintain comprehensive records of all received gifts in kind. This includes detailed descriptions of the donations, the donor’s information, and an estimated value for internal accounting and audit purposes. If the organization sells donated property for which the donor claimed a deduction of $5,000 or more within three years of receipt, the organization must file Form 8282, Donee Information Return, with the IRS and provide a copy to the donor.