Determining the Value of Donated Property for IRS / Tax Purposes


Determining the Value of Donated Property for IRS / Tax Purposes

IRS Appraisal

The IRS requires a qualified appraisal for donations of Real Estate over $5,000.  Empire Appraisal Group has been completing Real Estate Appraisals for IRS / Tax purposes for over 15 years.  Our chief appraiser, Daniel Lindeman meets the IRS definition of being a Qualified Appraiser.  Daniel is a graduate of Florida Atlantic University in Boca Raton, Florida.  Real estate has always been his passion, he holds a Certified Residential Appraiser License and a Sales Associate License.  Daniel has completed nearly 10,000 property appraisals.  He has been recognized nationally as an Extraordinary Appraiser by Solidifi, based on report quality, communication, turn times and more.  He speaks regularly at real estate offices, teaching agents about the appraisal process.  Daniel has also earned the RAA and MNAA appraisal designations and has been published in the Broward County Bar Association’s Barrister Magazine and Florida Realtor Magazine.

Call Empire Appraisal Group directly with any questions concerning your real estate values at 561-441-9298.  Also, check out our ‘Reviews’ page and see what others are saying about Daniel Lindeman and Empire Appraisal Group, Inc.

 

Below are excerpts from IRS Publication 561 (4/2007), Determining the Value of Donated Property.  Complete publication can be found at:

https://www.irs.gov/pub/irs-pdf/p561.pdf

 

Appraisals

Appraisals are not necessary for items of property for which you claim a deduction of $5,000 or less. (There is one exception, described next, for certain clothing and household items.) However, you generally will need an appraisal for donated property for which you claim a deduction of more than $5,000. There are exceptions. See Deductions of More Than $5,000, later.

The weight given an appraisal depends on the completeness of the report, the qualifications of the appraiser, and the appraiser’s demonstrated knowledge of the donated property. An appraisal must give all the facts on which to base an intelligent judgment of the value of the property.

The appraisal will not be given much weight if:

  • All the factors that apply are not considered,
  • The opinion is not supported with facts, such as purchase price and comparable sales, or
  • The opinion is not consistent with known facts.

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The appraiser’s opinion is never more valid than the facts on which it is based; without these facts it is simply a guess.

The opinion of a person claiming to be an expert is not binding on the Internal Revenue Service. All facts associated with the donation must be considered.

Deduction over $500 for certain clothing or household items.

You must include with your return a qualified appraisal of any single item of clothing or any household item that is not in good used condition or better, that you donated after August 17, 2006, and for which you deduct more than $500. See Household Goods and Used Clothing, earlier.

Cost of appraisals.

You may not take a charitable contribution deduction for fees you pay for appraisals of your donated property. However, these fees may qualify as a miscellaneous deduction, subject to the 2% limit, on Schedule A (Form 1040) if paid to determine the amount allowable as a charitable contribution.

Deductions of More Than $5,000

Generally, if the claimed deduction for an item or group of similar items of donated property is more than $5,000, you must get a qualified appraisal made by a qualified appraiser, and you must attach Section B of Form 8283 to your tax return. There are exceptions, discussed later. You should keep the appraiser’s report with your written records. Records are discussed in Publication 526.The phrase “similar items” means property of the same generic category or type (whether or not donated to the same donee), such as stamp collections, coin collections, lithographs, paintings, photographs, books, nonpublicly traded stock, nonpublicly traded securities other than nonpublicly traded stock, land, buildings, clothing, jewelry, furniture, electronic equipment, household appliances, toys, everyday kitchenware, china, crystal, or silver. For example, if you give books to three schools and you deduct $2,000, $2,500, and $900, respectively, your claimed deduction is more than $5,000 for these books. You must get a qualified appraisal of the books and for each school you must attach a fully completed Form 8283, Section B, to your tax return.

Exceptions.

You do not need an appraisal if the property is:

  • Nonpublicly traded stock of $10,000 or less,
  • A vehicle (including a car, boat, or airplane) for which your deduction is limited to the gross proceeds from its sale,
  • Qualified intellectual property, such as a patent,
  • Certain publicly traded securities described next,
  • Inventory and other property donated by a corporation that are “qualified contributions” for the care of the ill, the needy, or infants, within the meaning of section 170(e)(3)(A) of the Internal Revenue Code, or
  • Stock in trade, inventory, or property held primarily for sale to customers in the ordinary course of your trade or business.

Although an appraisal is not required for the types of property just listed, you must provide certain information about a donation of any of these types of property on Form 8283.

Real Estate

Because each piece of real estate is unique and its valuation is complicated, a detailed appraisal by a professional appraiser is necessary.

The appraiser must be thoroughly trained in the application of appraisal principles and theory. In some instances the opinions of equally qualified appraisers may carry unequal weight, such as when one appraiser has a better knowledge of local conditions.

The appraisal report must contain a complete description of the property, such as street address, legal description, and lot and block number, as well as physical features, condition, and dimensions. The use to which the property is put, zoning and permitted uses, and its potential use for other higher and better uses are also relevant.

In general, there are three main approaches to the valuation of real estate. An appraisal may require the combined use of two or three methods rather than one method only.

The comparable sales method compares the donated property with several similar properties that have been sold. The selling prices, after adjustments for differences in date of sale, size, condition, and location, would then indicate the estimated FMV of the donated property.

If the comparable sales method is used to determine the value of unimproved real property (land without significant buildings, structures, or any other improvements that add to its value), the appraiser should consider the following factors when comparing the potential comparable property and the donated property:

  • Location, size, and zoning or use restrictions,
  • Accessibility and road frontage, and available utilities and water rights,
  • Riparian rights (right of access to and use of the water by owners of land on the bank of a river) and existing easements, rights-of-way, leases, etc.,
  • Soil characteristics, vegetative cover, and status of mineral rights, and
  • Other factors affecting value.

For each comparable sale, the appraisal must include the names of the buyer and seller, the deed book and page number, the date of sale and selling price, a property description, the amount and terms of mortgages, property surveys, the assessed value, the tax rate, and the assessor’s appraised FMV.

The comparable selling prices must be adjusted to account for differences between the sale property and the donated property. Because differences of opinion may arise between appraisers as to the degree of comparability and the amount of the adjustment considered necessary for comparison purposes, an appraiser should document each item of adjustment.

Only comparable sales having the least adjustments in terms of items and/or total dollar adjustments should be considered as comparable to the donated property.

2. Capitalization of Income

This method capitalizes the net income from the property at a rate that represents a fair return on the particular investment at the particular time, considering the risks involved. The key elements are the determination of the income to be capitalized and the rate of capitalization.

This method, used alone, usually does not result in a determination of FMV. Instead, it generally tends to set the upper limit of value, particularly in periods of rising costs, because it is reasonable to assume that an informed buyer will not pay more for the real estate than it would cost to reproduce a similar property. Of course, this reasoning does not apply if a similar property cannot be created because of location, unusual construction, or some other reason. Generally, this method serves to support the value determined from other methods. When the replacement cost method is applied to improved realty, the land and improvements are valued separately.

The replacement cost of a building is figured by considering the materials, the quality of workmanship, and the number of square feet or cubic feet in the building. This cost represents the total cost of labor and material, overhead, and profit. After the replacement cost has been figured, consideration must be given to the following factors:

  • Physical deterioration—the wear and tear on the building itself,
  • Functional obsolescence—usually in older buildings with, for example, inadequate lighting, plumbing, or heating, small rooms, or a poor floor plan, and
  • Economic obsolescence—outside forces causing the whole area to become less desirable.

Qualified Appraisal

Generally, if the claimed deduction for an item or group of similar items of donated property is more than $5,000, you must get a qualified appraisal made by a qualified appraiser. You must also complete Form 8283, Section B, and attach it to your tax return. See Deductions of More Than $5,000, earlier.

A qualified appraisal is an appraisal document that:

  • Is made, signed, and dated by a qualified appraiser (defined later) in accordance with generally accepted appraisal standards,
  • Meets the relevant requirements of Regulations section 1.170A-13(c)(3) and Notice 2006-96, 2006-46 I.R.B. 902 (available at
    www.irs.gov/irb/2006-46_IRB/ar13.html),
  • Relates to an appraisal made not earlier than 60 days before the date of contribution of the appraised property,
  • Does not involve a prohibited appraisal fee, and
  • Includes certain information (covered later).

You must receive the qualified appraisal before the due date, including extensions, of the return on which a charitable contribution deduction is first claimed for the donated property. If the deduction is first claimed on an amended return, the qualified appraisal must be received before the date on which the amended return is filed.

Form 8283, Section B, must be attached to your tax return. Generally, you do not need to attach the qualified appraisal itself, but you should keep a copy as long as it may be relevant under the tax law. There are four exceptions.

  • If you claim a deduction of $20,000 or more for donations of art, you must attach a complete copy of the appraisal. See Paintings, Antiques, and Other Objects of Art, earlier.
  • If you claim a deduction of more than $500,000 for a donation of property, you must attach the appraisal. See Deductions of More Than $500,000, earlier.
  • If you claim a deduction of more than $500 for an article of clothing, or a household item, that is not in good used condition or better, that you donated after August 17, 2006, you must attach the appraisal. See Deduction over $500 for certain clothing or household items, earlier.
  • If you claim a deduction in a tax year beginning after August 17, 2006, for an easement or other restriction on the exterior of a building in a historic district, you must attach the appraisal. See Building in registered historic district, earlier.

 Information included in qualified appraisal.

A qualified appraisal must include the following information:

  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, including, for example, the terms of any agreement or understanding that:
    1. Temporarily or permanently restricts a donee’s right to use or dispose of the donated property,
    2. Earmarks donated property for a particular use, or
    3. Reserves to, or confers upon, anyone (other than a donee organization or an organization participating with a donee organization in cooperative fundraising) any right to the income from the donated property or to the possession of the property, including the right to vote donated securities, to acquire the property by purchase or otherwise, or to designate the person having the income, possession, or right to acquire the property,
  5. The name, address, and taxpayer identification number of the qualified appraiser and, 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,
  6. The qualifications of the qualified appraiser who signs the appraisal, including the appraiser’s background, experience, education, and any membership in professional appraisal associations,
  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 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, and
  11. The specific basis for the valuation, such as any specific comparable sales transaction.

 

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