So start with this:
Property is ordinary income property if you would have recognized ordinary income or shortterm capital gain had you sold it at fair market value on the date it was contributed...The amount you can deduct for a contribution of ordinary income property is its fair market value minus the amount that would be ordinary income or shortterm capital gain if you sold the property for its fair market value. Generally, this rule lim its the deduction to your basis in the property.
So for, let's say, a self-created painting, with $100 cost of materials and $10,000 FMV, the artist can only claim a donation of $100 because the other $9,900 would have been ordinary income.
Now, the rule for income property says that even though income property may be capital property, sometimes it must be treated under the rules for ordinary income property. To wit:
Property used in a trade or business is consid ered ordinary income property to the extent of any gain that would have been treated as ordi nary income because of depreciation had the property been sold at its fair market value at the time of contribution. See chapter 3 of Pub. 544, Sales and Other Dispositions of Assets, for the kinds of property to which this rule applies.
The funny thing here is that pub 544 describes the recapture on section 1231 property as "ordinary income". (Which I don't understand why it is not a straight 25%, see page 28-29 of pub 544.)
And going back to pub 526, it says "Don't reduce your charitable contribution if you include the ordinary or capital gain income in your gross income in the same year as the contribution. See Ordinary or capital gain income included in gross income under Capital Gain Property, later, if you need more information."
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So I take that to mean that the value of the donation is not cost basis (I was wrong about that), but FMV minus depreciation. If the property has lost value, the donation value would be FMV minus whatever part of depreciation would normally have to be recaptured.
Or, the taxpayer can claim a donation for the full FMV if they also report the recapture as income. (This might be sensible if the taxpayer's marginal rate is 28% or 33% since the recapture is at 25%.)
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So I think your first answer was right
@TaxGuyBill, the donation value is FMV minus deprecation. For non-income real property held more than one year, the taxpayer can deduct FMV, not cost, so for income property, the donation only has to be reduced by the recapture that is due.
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Clearly though, if a couple of pretty smart amateurs like us aren't sure, the taxpayer may want to ask a real accountant!
