First, let's assume you hold xzy corporation stock worth $5,000 and you purchased it several years ago for almost nothing (it could be a bond or mutual fund also). Let's further assume that your pledge for the year to the church is $5,000.

Example 1. You sell your stock for $5,000 (or maybe a little of it each month) and give it to the church for your pledge. In doing so you will receive the normal gift deduction to the church. However, you will be responsible for paying the capital gains tax of 20% on your appreciated stock. That means you will pay approximately $1,000 in taxes and your total outlay will be $6,000 (before the gift tax credit).

In this section we want to show you the possible tax savings involved by donating a piece of investment real estate (house, apartment, commercial building or land) that has appreciated while you have held it.

First, why would you consider such a donation? One likely reason is that you want to sell it and don't want to see much or all of the "profit" go to taxes. You would rather keep those profits yourself or benefit the church from your tax savings or both. You can receive a double tax advantage. You are allowed a deduction for the full current market price of the property and you do not have to pay capital gains tax on the increased value. This is not the same case if the property were sold.

Let's look at a simple example: Assume you have an investment property with a current fair market value of $50,000 that it originally cost $30,000 and that you have depreciated it by $20,000 for tax purposes. This would leave you with a capital gain of $20,000 and a possible recapture of $20,000.

Example 1. Using the above assumptions, you sell the property and then gift the proceeds to the church. You would have a $4,000 capital gains tax for the sale and a $7,800 recapture tax from the sale (assuming a 39% rate). Thus, before the gift you would pay $11,800 so you would gift $38,200. The church would receive $38,200 (for which it would be very grateful) and you would get a $38,200 tax credit.

Example 2. Using the same above assumptions, you gift the property to the foundation. The foundation sells the property and the church (through the foundation) receives $50,000 instead of $38,200. At the same time you DO NOT pay the capital gains tax or the recapture tax and you also receive a $50,000 tax credit.