Most charities are happy to take your car donation, but they typically don't have the money to pay you for all or part of the value of the car. If the charity is willing, however, it can give you cash back for your car donation -- but that reduces the value of your donation.
Bargain Sale Basics
When you get money back from the charity that you donate your car to, you can treat it as a bargain sale, which means you're treated as if you donated part of the car and you sold part of the car. The portion that represents a sale isn't deductible, obviously, but you are allowed to deduct the remaining value of the car. Not all charities are willing or able to engage in bargain sales for cars, so you may have to ask around to find one willing to work with you.
To figure the value of your donation, you need to know the fair market value of the car and the amount you received. Subtract the amount you received from the fair market value, not the amount you paid for the car. For example, suppose your car has a fair market value of $10,000 and the charity gives you $1,000. Even if you paid $25,000 originally for the car, you subtract the $1,000 you received from the charity from the fair market value of $10,000 to find your deduction is limited to $9,000.
Usually, cars are known for depreciating, so you won't have to worry about whether any increases in value are deductible. However, if you have a classic car, it's possible that the value has gone up. If so, and you've owned the car for more than a year, you can include the percentage of the appreciation in your deduction equal to the percentage of your donation. But, if the value has gone up but you've owned it for less than one year, it's a bit more complicated. First, subtract the payment from the fair market value to figure the contribution portion. Next, divide the fair market value of the contribution portion by the total fair market value. Last, multiply the result by your basis to find your deduction.
For example, say you paid $9,000 for the car and six months later when you donate it, it's now worth $10,000, and you received $2,000 as part of a bargain sale. First, subtract the $2,000 payment from the $10,000 fair market value to get $8,000 as the contribution portion. Next, divide your $8,000 basis by the $10,000 fair market value to get 0.8. Last, multiply 0.8 by your total basis of $9,000 to find you can deduct $7,200.
Since you're claiming a donation, you need a receipt from the charity within 30 days of the donation. Plus, if your car is worth more than $5,000, you need a qualified appraisal. The receipt needs to note the amount that you received in exchange for the car in addition to the other formalities like the name of the charity, the date of the donation and a description of the car that you donated.
Based in the Kansas City area, Mike specializes in personal finance and business topics. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool."