Ordinary Income Property: Deduction Limits, Basis, and Documentation

When you donate ordinary income property to charity, your deduction is capped at your cost basis in the asset, not its fair market value. Federal tax law under 26 U.S.C. § 170(e)(1)(A) requires you to subtract from fair market value any amount that would have been ordinary income or short-term capital gain if you had sold the property instead.¹ For most short-term held assets, that reduction wipes out the appreciation entirely and leaves you deducting what you paid. Getting the calculation wrong can trigger penalties of 20 to 40 percent of the resulting tax underpayment.

Which Assets Fall Under the Rule

Ordinary income property is any asset that would produce ordinary income or short-term capital gain if you sold it at fair market value on the day of the donation. The IRS lists several common categories: inventory, works of art created by the donor, manuscripts prepared by the donor, and capital assets held for one year or less.² The one-year line runs from the day after you acquire the asset through the date of donation, and it’s the same threshold that separates short-term from long-term capital gains elsewhere in the code.

Business property with depreciation recapture also lands here. Section 1245 property, which covers depreciable personal property used in a trade or business, generates ordinary income on disposition to the extent of depreciation previously claimed.³ Section 1250 property, depreciable real estate, triggers a similar reduction for depreciation taken above the straight-line method.

The creator rule catches people off guard. If you paint a canvas, write a manuscript, or develop software and then donate it, the IRS treats the whole value as ordinary income property no matter how long you held it. You built the value through labor rather than buying an asset that appreciated, so your deduction is limited to whatever materials and direct costs you can document. That basis is often close to zero.

How Much You Can Actually Deduct

Start with fair market value on the date of the gift. Subtract whatever portion of that value would have been ordinary income or short-term capital gain if you had sold the property. What’s left is your deduction.¹ In practice, this reduces the deduction to your cost basis.

The IRS gives this example: you donate stock you held for five months to your synagogue. Fair market value on the donation date is $1,000, but you paid $800. Because the $200 of appreciation would be short-term capital gain if sold, your deduction is $800.² The same math applies to equipment, collectibles, and inventory.

When fair market value has fallen below your basis, the deduction is limited to that lower fair market value. You cannot deduct the loss. If you bought equipment for $5,000 and donate it when it’s worth $3,000, you deduct $3,000. This is where donating depressed property actually costs you: a sale would let you recognize the $2,000 loss, while a donation gives it up. Selling the asset, claiming the loss, and donating the cash is usually the better move when property has declined.²

What Counts as Your Cost Basis

Because your deduction almost always equals your basis, what goes into that number matters more than in most tax calculations. Basis is not just the purchase price on the receipt. It includes freight charges, sales tax, installation and testing costs, and excise taxes paid at acquisition.⁴ If you built the asset or had it constructed, labor, materials, architect fees, building permits, and contractor payments all count.

Improvements with a useful life of more than one year raise your basis after purchase. Bought a piece of equipment for $3,000 and later spent $1,200 on an upgrade that extended its useful life? Your basis is $4,200. Legal fees to defend or perfect title, zoning costs, and assessments for local improvements that increase property value also get added.⁴

For depreciable business property, reduce basis by any depreciation you claimed. A $10,000 machine on which you took $3,000 in depreciation has an adjusted basis of $7,000, and that’s the ceiling on the charitable deduction. Allowing the original cost would let you double-count the depreciation benefit.

You Have to Itemize

Charitable deductions for donated property are available only if you itemize on Schedule A. The 2026 standard deduction is $16,100 for single filers, $24,150 for heads of household, and $32,200 for married couples filing jointly.⁵ If your itemized total including the donation doesn’t clear the threshold, the gift produces no tax benefit.

Starting in 2026, non-itemizers can deduct up to $1,000 ($2,000 joint) for cash contributions.⁶ That above-the-line deduction applies only to cash, not property. Run the numbers before assuming a property donation will reduce your tax bill.

AGI Limits and Carryovers

Even after you itemize, total charitable deductions are capped as a percentage of adjusted gross income. The limits depend on what you donated and to whom:

50% of AGI for noncash contributions of ordinary income property to public charities, churches, educational institutions, hospitals, and government entities.¹
30% of AGI for contributions to non-operating private foundations and contributions made “for the use of” a qualified organization rather than directly “to” it.²

These ceilings apply to all your charitable giving for the year, not just property. Cash gifts, subject to their own 60% limit, reduce the room left under the 50% cap. Anything above the applicable limit carries forward for up to five succeeding tax years, used in chronological order.⁷

When You Can Deduct More Than Basis

A few narrow exceptions let donors claim more than cost basis for property that would otherwise be ordinary income property. Each has its own requirements.

C-Corporation Inventory for the Ill, Needy, or Infants

C-corporations can claim an enhanced deduction on donated inventory used solely for the care of the ill, the needy, or infants. The recipient must be a 501(c)(3) public charity or private operating foundation and must provide a written statement confirming the property will be used for those purposes and not resold.⁸ The deduction equals fair market value minus half the unrealized appreciation, capped at twice the cost basis.¹

Food Inventory Donations

Food is the exception to the C-corp-only rule. Under a provision made permanent by the PATH Act of 2015, any taxpayer, including S-corporations, partnerships, and sole proprietors, can claim the enhanced deduction when donating apparently wholesome food from a trade or business.¹ Same formula: basis plus half the appreciation, capped at twice basis. Non-C-corp taxpayers face an additional cap of 15 percent of aggregate net income from all trades or businesses that made food contributions during the year.

Scientific Research Property

C-corporations may also claim an enhanced deduction for certain scientific property donated to an educational or scientific research organization. The donee must provide a written statement confirming the property will be used for research or experimentation, or for research training, in the physical or biological sciences within the United States.⁹

Intellectual Property

Donations of patents, copyrights, trademarks, trade secrets, and similar intellectual property start with the standard ordinary income property rule: the initial deduction is limited to the lesser of basis or fair market value. After that, you may claim additional deductions in the year of the gift and in later years based on income the property actually generates for the charity, to the extent those amounts exceed the original deduction. The window closes at the earlier of the IP’s legal life or the tenth anniversary of the donation. You must notify the receiving organization at the time of the gift that you intend to use these provisions, and the organization reports income on Form 8899.²

Vehicles

Vehicles are one of the most commonly donated types of property, and the rules are stricter than for most other assets. If the charity sells the vehicle, your deduction is limited to the actual sale price, not Kelley Blue Book or your own estimate of fair market value.¹⁰ Fair market value is available only if the charity makes significant use of the vehicle, makes material improvements to it, or gives it to a needy individual at a below-market price to further its charitable mission.

The charity must provide a contemporaneous written acknowledgment, typically on Form 1098-C, which reports to both you and the IRS.¹⁰ If you held the vehicle for one year or less, the ordinary income property reduction rule stacks on top of the vehicle-specific limits, so your deduction cannot exceed your basis even when the sale price or fair market value is higher.

Partial Interests

You generally cannot deduct a donation of less than your entire interest in a piece of property. Letting a charity use a building rent-free for a year is treated as a partial interest gift and produces no deduction.¹¹ Three exceptions exist:

An undivided fractional share of every right you hold in the property, extending over the full term of your ownership.
A remainder interest in a personal residence or farm, transferring future ownership while you keep lifetime use.
A qualified conservation contribution: an easement or similar restriction donated to preserve land for environmental, scenic, or historical purposes.

These exceptions apply to ordinary income property just as they apply to long-term capital gain property, but the basis-limitation rule still governs the calculation.¹¹

Documentation That Protects the Deduction

Courts read the substantiation requirements strictly. Taxpayers have lost deductions for legitimate donations at reasonable values because they missed a documentation step.

Written Acknowledgment for Gifts of $250 or More

Any single contribution of $250 or more requires a contemporaneous written acknowledgment from the charity. It must include the organization’s name, a description of the donated property (not a valuation), and a statement about any goods or services provided in return.¹² “Contemporaneous” means in hand by the earlier of the date you file or the return’s due date including extensions. Without it, the deduction is disallowed.

Form 8283 for Noncash Contributions Over $500

File Form 8283 whenever your deduction for noncash contributions exceeds $500 per item or per group of similar items.¹³

Section A covers claimed deductions of $5,000 or less per item. You describe the property, report cost basis, state fair market value, and explain how you arrived at the value. No appraisal is needed.
Section B applies to deductions over $5,000 and requires a qualified appraisal by a qualified appraiser. The appraisal must be signed and dated no earlier than 60 days before the contribution, and you must have it before the return’s due date.⁹

Publicly traded securities and inventory reported under Section 1221(a)(1) go in Section A regardless of value, because market prices and accounting records make an independent appraisal unnecessary.

Qualified Appraiser Standards

A “qualified appraiser” must hold a recognized designation from a professional appraisal organization for the type of property in question, or must have completed professional-level coursework in valuing that type of property plus at least two years of relevant experience. The appraiser must regularly perform appraisals for compensation and must declare their qualifications in the appraisal itself.⁹ Someone who sold you the property or was otherwise a party to the acquisition cannot serve as the appraiser.

Keep purchase receipts, brokerage confirmations, contracts, and records of improvements. These establish the two facts that determine nearly everything about an ordinary income property deduction: what you paid and when you acquired the asset. Without documentation of basis and holding period, the deduction has no defensible foundation.

Penalties for Overvaluation

Inflated property valuations draw escalating penalties. A substantial valuation misstatement, where the claimed value is 200 percent or more of the correct amount, triggers a penalty equal to 20 percent of the tax underpayment.¹⁴ A gross valuation misstatement, at 400 percent or more, doubles that to 40 percent. If the correct value is zero, any claimed value is automatically a gross misstatement.

The penalties apply only when the total tax underpayment attributable to valuation misstatements exceeds $5,000, or $10,000 for C-corporations.¹⁴ That floor sounds generous, but donors of ordinary income property cross it more often than expected, particularly when they claim fair market value instead of basis for short-term assets. Courts have consistently upheld these penalties and have shown little patience for “substantial compliance” arguments.

1
Office of the Law Revision Counsel. 26 USC 170 – Charitable, Etc., Contributions and Gifts
2
Internal Revenue Service. Publication 526, Charitable Contributions
3
Internal Revenue Service. Publication 544, Sales and Other Dispositions of Assets
4
Internal Revenue Service. Publication 551, Basis of Assets
5
Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026
6
Internal Revenue Service. Topic No. 506, Charitable Contributions
7
eCFR. 26 CFR 1.170A-10 – Charitable Contributions Carryovers of Individuals
8
Internal Revenue Service. Ordinary Income Property – Charitable Deduction Rules for Short-Term Held Assets
9
Internal Revenue Service. Instructions for Form 8283
10
Internal Revenue Service. IRS Guidance Explains Rules for Vehicle Donations
11
eCFR. 26 CFR 1.170A-7 – Contributions Not in Trust of Partial Interests in Property
12
Internal Revenue Service. Charitable Contributions – Written Acknowledgments
13
Internal Revenue Service. Instructions for Form 8283
14
eCFR. 26 CFR 1.6662-5 – Substantial and Gross Valuation Misstatements Under Chapter 1