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[[I checked the Taxes FAQ and didn't see a likely topic, so I thought I'd simply post my question.
What are the rules regarding the deduction allowable for charitable deduction of property (a car
purchased for personal use) that has lost value? In particular, there are a number of (apparently
reputable) charities that advertise their willingness to deduct full blue book value, even though I'm
skeptical I could get that price on the open market.]]

Thanks for checkin' out the Taxes FAQ area before posting. And, as you noted, other than a small post on non-cash charitable contributions, there is really nothing there on point. But thanks for taking the time.

First, you must remember that YOU are responsible for arriving at, and defending the valuation. What the charity might think that it's worth is really meaningless. But let's move on.

Under the rules, you will be entitled to a charitable deduction equal to the fair market value of the car. The value is usually set according to the 'Blue Book' listings for used cars published by the National Automobile Dealers Association. In some cases, this value will exceed the amount you could actually get on a sale. If the car is in terrible condition, however, and is worth much less than its 'Blue book' value, you must use its true market value, not its 'Blue Book' value.

The donation approach saves you the trouble involved with trying to sell the car. Many charities even offer the added convenience of picking up the car at your home and saving you the trip.

If you donate your used car to charity, make sure you take the steps needed to substantiate your tax deduction. First, you need a written acknowledgement from the charitable organization stating that you made the donation, describing the car, and noting that the charity provided no services in exchange for it.

Second, if the value is over $500, Form 8283 must be attached to your tax return showing when and how you acquired the car and its original cost. If the value is over $5,000, special rules requiring an appraisal apply.

So this might not be as easy as it first seems. But with proper records and valuations, it's a nice way to rid yourself of an unwanted auto.

[[ In the alternative, we sold the car to a relative for slightly more than that price (pursuant to a written contract), giving the relative the option (for approximately two months) either to (1) resell the car to us at blue book, (2) abandon option (1) by paying us the approximate tax savings we were
foregoing, or (3) fail to exercise either option (1) or (2) by the start of the summer, in which case
we would be owed the full purchase price.

I'm comfortable that the transaction, although
convoluted, was a bona fide sale for the higher purchase price; that's the price we reported to the
DMV for sales tax purposes. My question, though, is whether these complications were necessary.
Could we have simply agreed to buy the car back for $1000 and soon thereafter taken a charitable
deduction for $2500?]]

That would be difficult in that if the transaction was at arms length, it could be argued that $1,000 was the true FMV of the auto. Without some additional documentation that would indicate that the $1,000 is some sort of "bail out" payment, I'm afraid that IRS would claim that the FMV would be what a willing seller and willing buyer agree upon.

Hope this helps...
TMF Taxes
Roy
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