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Protecting Your Charitable Deduction

10/03/2016  |  By: Matt Painter, JD, Shareholder, Wealth Advisors

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To qualify as a “Qualified Appraisal” (generally required for charitable gifts of assets other than cash or marketable securities where the claimed deduction will be in excess of $5,000) the appraisal must, among other things, set out:

  • The date (or expected date) of the gift,
  • The fair market value as of the date or expected date of the gift, and
  • A statement that the appraisal was for federal income tax purposes.

If you are a client having to foot the bill for a required appraisal, you may think so what? Well the answer is that your entire charitable deduction hinges on meeting the tax filing requirements including timely meeting the Qualified Appraisal requirement.

While there may have been an instance or two of the Tax Court letting a taxpayer off easy or someone successfully making a substantial compliance argument, the pain and suffering involved in getting to that point makes front-end compliance with the requirements a no-brainer. With the total deduction at stake, would you want to count on the largess of the Tax Court or the IRS?

I pulled the treasury regulations to see what is required for a Qualified Appraisal. Believe me – it’s a pretty impressive list. I will try to cover the basic concepts for you and give you a sense of the requirements. However, if you are planning or reporting a gift to which these rules apply, I suggest that you review IRS Publication 561 – Determining the Value of Donated Property and get your tax advisor involved on the front end.

Basic Requirements for Qualified Appraisal

Qualified Appraisal

One of the documents generally required for charitable gifts of assets other than cash or marketable securities where the claimed deduction will be in excess of $5,000. In some cases it must be attached to your tax return. It must:

  1. Be signed and dated by a Qualified Appraiser (more to follow).
  2. Must relate to an appraisal made not more than sixty (60) days before the contribution.
  3. Not contain a prohibited appraisal fee. Generally, no part of the fee arrangement for a qualified appraisal can be based on a percentage of the appraised value of the property.

It must contain:

  1. A description of the property in sufficient detail for a person who is not generally familiar with the type of property to determine that the property appraised is the property that was (or will be) contributed,
  2. The physical condition of any tangible property,
  3. The date (or expected date) of contribution,
  4. The terms of any agreement or understanding entered into (or expected to be entered into) by or on behalf of the donor that relates to the use, sale, or other disposition of the donated property,
  5. The name, address, and taxpayer identification number of the qualified appraiser. If the appraiser is a partner, an employee, or an independent contractor engaged by a person other than the donor, the name, address, and taxpayer identification number of the partnership or the person who employs or engages the appraiser must also be included,
  6. The qualifications of the Qualified Appraiser who signs the appraisal.
  7. A statement that the appraisal was prepared for income tax purposes,
  8. The date (or dates) on which the property was valued,
  9. The appraised fair market value (“FMV”) on the date (or expected date) of contribution,
  10. The method of valuation used to determine FMV, such as the income approach, the comparable sales or market data approach, or the replacement cost less depreciation approach,
  11. The specific basis for the valuation, such as any specific comparable sales transaction. 

That’s a lot! The big problem is that there are a bunch of great appraisers out there doing good work every day who have absolutely ZERO idea the report that they are being asked to prepare needs to meet the above requirements. Unless the client tells them that the report is to support a charitable income tax deduction and the client (or their tax advisor) puts them on track regarding the Qualified Appraisal requirements, the appraiser may well give them back a great report detailing the value of the property but the report may be of no value in obtaining a charitable deduction. 

Qualified Appraiser

A Qualified Appraisal must be prepared by a Qualified Appraiser. I’m not going to go into a lot of detail on this issue except to say in broad terms:

It needs to be a professional appraiser.

By that I mean someone licensed and appropriately credentialed to appraise the property being appraised OR they must meet certain minimum education and experience requirements. Additionally, it must be someone who regularly prepares appraisals for the type of property involved.

It cannot be an excluded or prohibited individual.

It cannot be (1) the donor claiming the deduction, (2) the recipient of the property, (3) generally a party to the transaction in which the donor acquired the property being appraised, (4) a person employed by the preceding, (5) a person related to these excluded persons (or a person married to such a related person), or (6) someone who does the majority of his appraisals each year for a person in (1), (2) or (3). Also, it cannot be prepared by someone prohibited from practicing before the IRS.

I think that all makes good sense. Basically, it has to be by someone who is truly qualified and who prepares appraisals for a living. For example, while your neighbor may be a licensed relator and have 30 years of experience in selling farms, unless he is also a certified real estate appraiser you cannot use his opinion as a Qualified Appraisal. Additionally not you, nor your family, nor your employees can prepare the appraisal. 

Form 8283 Section B

This is an additional form that must be prepared and filed with your income tax return to substantiate a deduction of property (other than publicly traded securities) of over $5,000. This form will be signed by you, the donee charity and the qualified appraiser. This is the form that meets the requirements of the treasury regulations for a “completed appraisal summary.”

In short, you need to have a Qualified Appraisal, prepared by a Qualified Appraiser, and you, your donee charity and the Qualified Appraiser will all have to sign a fully prepared Form 8283 Section B which will be filed with your return. That’s a lot of compliance – but your deduction depends on these things being timely done. 

In the same vein, as you go about the above, make sure that you obtain and keep a “Contemporaneous Written Acknowledgment” of your contribution. The Contemporaneous Written Acknowledgment must generally be obtained by the donor no later than the date the donor files the return for the year the contribution is made. It must state whether the donee provided any goods or services in consideration for the contribution. If the donee provided goods or services to the donor in exchange for the contribution (a quid pro quo contribution), it must include a good faith estimate of the value of the goods or services. The charity is not required to record or report this information to the IRS on behalf of a donor. The donor is responsible for requesting and obtaining the Contemporaneous Written Acknowledgment from the charity. For more information, see IRS Publication 1771 – Charitable Contributions: Substantiation and Disclosure Requirements.

Final Thoughts

I have tried to outline for you many of the requirements in reporting charitable gifts in excess of $5,000. Please also be aware that these may represent only a portion of the issues that you may need to be aware of depending on the type of gift you are making.

There are special rules when donating:

  •  Clothing or household items,
  •  A car, boat, or airplane,
  •  Taxidermy property,
  •  Property subject to a debt,
  •  A partial interest in property,
  •  A fractional interest in tangible personal property,
  •  A qualified conservation contribution,
  •  A future interest in tangible personal property,
  •  Inventory from your business, or
  •  A patent or other intellectual property.

The above does not cover all of the things that need to be considered if a private foundation or qualifying trust is involved. Charitable contributions are so important and make possible so many wonderful things in our society. Be sure that when making them you consult with your tax advisor on the front end to insure that you are able to benefit from the deduction you deserve.