Private Foundation vs Donor-Advised Fund: 1.39% Tax, 5% Payout

What each one is in the Code

A private foundation is not a separate legal species. Section 509(a) defines the term by exclusion: “a domestic or foreign organization described in section 501(c)(3) other than” the public charities and supporting organizations that the rest of the section lists. The family foundation people picture is a non-operating foundation: it gives grants and does not run its own charitable program. A private operating foundation, which runs its own program, is outside the 5% payout tax (4942(a)(1)), and the IRS says an exempt operating foundation is not subject to the 1.39% tax either. This page is about the non-operating kind, because that is the one a donor with appreciated stock or property is choosing between.

A donor-advised fund is an account. Section 4966(d)(2)(A) describes it as a fund “which is owned and controlled by a sponsoring organization” and for which a donor “has, or reasonably expects to have, advisory privileges.” The sponsor must be an organization that “is not a private foundation,” and to deduct the gift at all the donor needs a written acknowledgment that the sponsor “has exclusive legal control over the assets contributed” (170(f)(18)(B)). Everything below follows from that split: with a foundation you own an organization and carry its taxes; with a DAF you give the assets away and recommend where the money goes. Our donor-advised fund guide for real estate and private shares covers what the sponsors accept.

Side by side

Sources: 26 U.S.C. 170, 4940 to 4945, 4966, 6104 (Cornell LII, read October 26, 2026); IRS pages on the tax on net investment income and on private foundation excise taxes; Instructions for Form 990-PF (2025); Rev. Proc. 2026-5; Fidelity Charitable and Vanguard Charitable fee pages. The 4966 and 4967 comparison is our reading.

The deduction: 30%, 20% and the basis rule

The limits come from different paragraphs of section 170(b)(1), and the order matters. Cash to a sponsor is allowed up to 60% of the “contribution base,” which the Code defines as adjusted gross income (170(b)(1)(G)(i) and (H)). Long-term capital gain property is held to 30% (170(b)(1)(C)(i)), with the excess carried to “the 5 succeeding taxable years.” For a gift to a private foundation the limit on capital gain property is the lesser of 20% of the contribution base and 30% less the capital gain property given to public charities that year (170(b)(1)(D)(i)), and cash is held to 30% (170(b)(1)(B)).

The bigger difference is the amount, not the limit. Section 170(e)(1)(B)(ii) reduces a gift of capital gain property “to or for the use of a private foundation” by the gain, so the deduction falls to basis. The exception is “qualified appreciated stock,” meaning stock for which market quotations “are readily available on an established securities market,” and even that fails to the extent the donor’s gifts of one company’s stock go beyond the 10% test of 170(e)(5)(C). Real estate, an LLC interest, a Reg A share or a non-traded REIT or BDC share is not listed, so the foundation deduction is basis (our reading). A foundation that passes 100% of the gift out as qualifying distributions by the 15th day of the third month after its year closes, a “pass-through” foundation, falls outside the reduction (170(b)(1)(F)(ii)).

Example 1, our arithmetic. A donor with adjusted gross income of $1,000,000 in every year gives an asset worth $1,000,000 with a basis of $200,000, held long term. We ignore the 0.5% floor of 170(b)(1)(I) and the 2/37 reduction, which our charitable deduction guide works through, and assume the donor and family hold no more than 10% of a listed company’s stock.

The last row loses $800,000 of deduction against the DAF. The tax value of that depends on a bracket and on the limits in your own year, which is the part only a return can answer. A donor can also elect under 170(b)(1)(C)(iii) to apply the basis reduction to all capital gain gifts of a year in exchange for a higher limit, which is a trade for assets with little gain (our reading).

The 1.39% tax, and what it is a tax on

Section 4940(a) imposes “a tax equal to 1.39 percent of the net investment income” of a tax-exempt private foundation. The IRS page on the tax on net investment income puts it plainly: “For tax years beginning after Dec. 20, 2019, the excise tax is 1.39% of net investment income, and there is no reduced 1 percent tax rate.” The 2019 law, Pub. L. 116-94 section 206, substituted 1.39 percent for 2 percent and struck the old subsection (e) that had cut the rate for foundations meeting a distribution test. The tax is reported on Form 990-PF and is subject to estimated tax payments once the total tax for the year reaches $500.

Net investment income is “the sum of the gross investment income and the capital gain net income” less deductions (4940(c)(1)). Gross investment income is interest, dividends, rents, securities-loan payments and royalties (4940(c)(2)). Three consequences follow (our reading). The tax lands on realized gains, so a foundation that rebalances pays 1.39% on them. It is a tax on income, not on assets, so a year of no sales and little yield costs little. And it is small next to the 5% payout, because it is charged on the return and the payout is charged on the principal.

The 5% payout: a percentage of what, and what counts

The payout in section 4942 is not 5% of income. The “minimum investment return” is “5 percent of the excess of” the fair market value of the foundation’s assets, other than those used directly for its charitable purpose, over any acquisition debt (4942(e)(1)). Listed securities are valued monthly (4942(e)(2)(A)). The distributable amount is that return reduced by the taxes under subtitle A and under 4940 (4942(d)), so the 1.39% tax lowers the payout by the same dollars. Reasonable and necessary administrative expenses paid for the charitable purpose can count toward it (4942(g)(1)(A)), and a year in which the foundation paid out more than required can adjust later years under 4942(i).

If the amount is not distributed in time, section 4942(a) imposes “a tax equal to 30 percent of the amount of such income remaining undistributed” at the start of the second following taxable year, and 4942(b) adds 100% of what is still undistributed at the close of the taxable period.

Example 2, our arithmetic. A non-operating foundation holds $5,000,000, all of it counted in the base and none with acquisition debt. In the year it has $100,000 of interest, dividends and rents, $150,000 of realized gains and $30,000 of deductible investment expenses.

The two last lines are not a like-for-like cost comparison. The foundation also pays for its own investment management, legal, accounting and Form 990-PF preparation, none of which we found a primary source for, and the DAF’s investment fee depends on the funds chosen. The DAF side shows the difference in a different form: a sponsor can set its own activity rule, and Fidelity Charitable’s FAQ says that after “two years in which no grants are distributed” it will “grant 5% from the Giving Account balance to an IRS-qualified public charity.” That is a policy of one sponsor. It is not a Code requirement and it is not the same as a yearly rate.

Two practical points on the base. First, the 5% is charged on assets that sit idle as well as those that perform, so an illiquid asset such as a building still adds to the number while producing no cash for the grants (our reading). Second, because the base includes the value of real estate, the valuation rules below matter.

The other excise taxes on a foundation

The IRS lists five provisions that tax a foundation, its managers or its substantial contributors for certain acts, in addition to the tax on investment income, and reports them on Form 4720. A DAF account is outside most of them (our reading); the exception is 4943, which applies to it by 4943(e). The table gives the first and second tiers as they read in the Code.

Permitted holdings in a corporation are 20% of the voting stock, reduced by the percentage owned by all disqualified persons (4943(c)(2)(A)), or 35% when a third party has effective control (4943(c)(2)(B)). A donor who owns a family company and wants to give shares to a foundation is the case where that rule bites. Section 4943(e)(1) applies the same rule to a DAF, so for private shares the 20% test is common to both; our DAF guide has the five-year sale period.

What changes when the asset is real estate or private shares

The foundation keeps the asset, and that has three effects. The deduction is basis (above). The real estate counts in the 5% base at its value, and the Form 990-PF instructions say real estate “may be valued every 5 years” if a written, certified, independent appraisal is made by a qualified person who is not a disqualified person or an employee, while other non-listed assets are valued each year by employees or anyone else, “even if that person is a disqualified person.” And any dealing between the donor and the foundation, such as renting the building to the donor’s company or lending to a family member, falls within the IRS’s description of self-dealing “between private foundations and their substantial contributors or other disqualified persons.”

A DAF sponsor, by contrast, decides whether to accept the property and almost always sells it, and the donor deducts the appraised value. For the qualified appraisal, Form 8283 and the sponsors' policies, see our guide to donating real estate. For giving property and keeping an income stream, a charitable remainder trust or a charitable lead trust is a third and fourth structure, and each treats a private foundation remainder or lead beneficiary under its own rules.

Control, and who can read your name

The foundation’s board picks the grantees. In the DAF, section 170(f)(18)(B) requires the sponsor to hold “exclusive legal control,” and 4966(d)(2)(A) calls the donor’s role “advisory privileges.” That is the price of the larger deduction and of no excise tax.

Publicity runs the other way. The Instructions for Form 990-PF (2025) say “The foundation’s Form 990-PF, Form 990-T, and exemption application must be made available to the public by the foundation and the IRS.” The Code carves out contributor names for every other organization: section 6104(d)(3)(A) says that for an organization “which is not a private foundation” the inspection rule “shall not require the disclosure of the name or address of any contributor.” A private foundation is the exception, so its return can show who funded it (our reading of the two texts together). A donor who wants to give without a public trail should know that the public copy of a sponsor’s return need not list the donor.

What it costs to start and to run

To exist as a tax-exempt foundation, the organization files Form 1023 electronically. The user fee in Appendix A of Rev. Proc. 2026-5 is $600, with $275 for the Form 1023-EZ, which is open only to an organization whose total assets do not exceed $250,000 at fair market value, so a foundation funded with the sums in this page’s examples files the full form. The annual return is the Form 990-PF, due “the 15th day of the 5th month following the close of the foundation’s tax year” and required to be filed electronically for 2025. State registration, legal drafting, audit or review, and investment management have costs we could not source; ask for written quotes before comparing.

A DAF costs a fee on the balance, and the schedule belongs to the sponsor. Vanguard Charitable requires $25,000 to open an account and, effective October 1, 2026, charges an administrative fee of 0.60% on the first $500,000, 0.30% on the next $500,000 and 0.11% on the next $4,000,000, with 0.09% and 0.08% above that; an investment fee is added. Fidelity Charitable’s individual account has no minimum initial contribution. The fees are a published schedule, set by the sponsor and changeable by it.

What a donor can do with this

This is the checklist we would put on a CPA’s desk, not a recommendation (our reading):

• Name the asset first. Listed stock, real estate and private shares are deducted at three different amounts in a foundation, and at one amount in a DAF.
• Run the carryover. The 30% and 20% limits turn a large gift into a multi-year deduction; count the years against your own adjusted gross income, the 0.5% floor and the 5-year cut-off.
• Put the 5% in dollars. Multiply the foundation’s expected assets by 5% and ask where the cash will come from if part of the base is a building or a private company.
• Decide how much control and publicity you want. A board and a name on every grant come with a public Form 990-PF and with the four other excise taxes.
• Compare the true cost. A published DAF fee and a foundation’s own bills are different kinds of numbers.

Charitable giving also works with the rest of your estate and income-tax plan; the capital gains guide shows the gain a gift avoids.

This is analysis of public documents, not investment, legal or tax advice. Every case depends on facts of its own. The person who can say what a gift is worth to you is a CPA or tax attorney with your return and your asset.

FAQ

Sources, read and saved on October 26, 2026: 26 U.S.C. 170, 4940, 4941, 4942, 4943, 4944, 4945, 4966 and 6104 (Legal Information Institute, Cornell Law School, text of the United States Code, with the notes on Pub. L. 116-94 and Pub. L. 119-21); 26 U.S.C. 509; IRS, Tax on net investment income (page last reviewed September 11, 2026); IRS, Private foundation excise taxes (page last reviewed June 28, 2026); Instructions for Form 990-PF (2025); About Form 1023; Rev. Proc. 2026-5 as published in Internal Revenue Bulletin 2026-1; Fidelity Charitable, fees and minimums FAQ; Vanguard Charitable, fees and minimums (administrative fee schedule effective October 1, 2026). Sums, shares and examples are our arithmetic; interpretations marked “our reading” are ours. We did not verify state registration, legal, audit or investment-management costs. This is analysis of public documents, not investment, legal or tax advice.