Making a gift to a charity can be as simple as writing a check—but the donation of appreciated assets such as securities or other property can help minimize the income taxes generated by giving the gift.  

What type of gift makes the most sense? That depends on a few variables:

• The type of assets a benefactor is willing to donate.
• The tax treatment a donor can receive, based on the type of asset bestowed.
• The level of gift-making complexity a donor and charity will accept.

The type of property donated often makes little difference to the charity, so long as the organization is equipped to handle the sale. (Some smaller or newer charities are not, particularly when it comes to a more complicated property sale.) But that asset can have a large effect on a donor’s tax and estate plan. Below, we outline three types of assets that can be donated to a charity.

The fastest, easiest, most straightforward contribution is cash. That includes writing a check, transferring electronic funds, or dropping a few bucks in a donation bucket. Any of these methods give a donor full control over the amount and timing of when a gift is received. There is also a possible tax deduction of the amount donated, so long as deductions are itemized, up to the IRS income deduction limits.

• The method is easy and straightforward.
• The donor retains control over the amount and timing of the donation.
• The donor receives a tax deduction, potentially for the entire amount of donation.

Donating appreciated securities in-kind is a bit more complicated, but the benefits may be worth the trade-off. Just like with cash, a donor retains control over timing and the amount of the gift. A donor also receives a deduction for the fair market value of the securities. Furthermore, by gifting in-kind, a donor won’t have to pay taxes on any unrealized capital gains that would be generated by selling these securities to generate cash to make the donation.

Example: Bob and Jill are married and file a joint tax return; together, they have an adjusted gross income of $100,000 and decide to donate $10,000 to charity. They will fund this gift using 50 shares of stock purchased several years ago for $100 each that are now worth $200 each. By gifting the appreciated shares in-kind, Bob and Jill realize an additional tax benefit of $750. The tax impact of gifting the stock versus selling it and making a cash gift of $10,000 is as follows.

• Assumptions for charitable donation, taxable income, and tax on income are the same for both approaches.
• Gifting appreciated securities results in additional tax benefit of $750 from nonrecognition of gains.

• Greater tax benefit. In addition to taking the deduction for the fair market value of the securities, the donor avoids the capital gains tax that would be incurred if they sold the appreciated securities to generate the cash donation.
• Opportunity for portfolio rebalancing. Gifting securities in-kind can also be a way of making portfolio adjustments that would need to be made in any case—like rebalancing, reallocating, or managing for annual distributions.
• Save the time, effort, and expense associated with the sale of the property. The charity that receives the donation will handle the sale of the security. Charities are not subject to income tax on this type of transaction.
• The tax benefit could help fund later donations. Money that would otherwise have gone to pay capital gains tax can be saved by the donor and used later to make further gifts. 

• Consider the one-year rule. To avoid the capital gains tax, the donor must have held the securities for at least one year. An in-kind donation of securities can require additional paperwork and can take additional time to complete.
• Deduction limits are different than those for a cash gift. A consultation with a tax advisor is recommended.
• This strategy is best suited for appreciated assets. When selling a security at a loss, it may be more beneficial to sell the asset, realize the loss, and donate the resulting proceeds. It’s a good idea to consult with a tax advisor.

In addition to securities, many charitable organizations will accept in-kind donations of other property, including real estate, motor vehicles, art, and collectibles. The donor considerations here are similar to those associated with appreciated securities, but the magnitude is often greater. The gift of real estate, for example, can require a good deal more paperwork—including the transfer of the deed and tax records— and a significantly longer transfer period than a gift of appreciated securities will.

In general, the benefits of this type of gift are much like those of appreciated securities. 

• It can take more time. A charity may need a long time to sell a building, piece of art, or vintage car. During the sales process, the value of the asset can change, sometimes significantly. While this won’t affect the amount of the donor’s deduction, it may impact the amount ultimately received by the charity.
• It can be difficult to value property. The valuation provided must be acceptable to the IRS. Sometimes the assessment process is imprecise.
• The deduction rules on property donations are complex. A consultation with a tax advisor is recommended.
• Not all charities will accept gifts of property. Donors should confirm that their target charity can do so.

An optimal gifting strategy may include more than one type of asset. A financial advisor can help a donor balance the different tax deduction limits for cash, appreciated securities, and property to help secure the maximum allowable income tax deduction.

• Charitable giving: Three elements of a successful plan (14-page research paper, issued September 2022)
• A conversation with Vanguard Charitable’s Rebecca Moffett (commentary, issued August 2022)