Pathway to deducting non-cash gifts over $5,000

Donations of non-cash property to charity can provide a valuable charitable deduction. You can deduct the fair market value of the property on the date of the contribution.

Because of multiple past abuses where taxpayers substantially overvalued their property contributions, strict substantiation rules apply, and failure to follow them can cause the IRS to deny your deductions.

If you claim a charitable deduction of more than $5,000 for any single item of property or for multiple similar items or personal or real property, you face the strict requirements.

You need to do three relatively straightforward things to deduct non-cash contributions over $5,000.

Obtain charity acknowledgement. You must obtain a contemporaneous written acknowledgement from the charity containing
- The name of the charity,
- The date and location of the contribution,
- A reasonably detailed description of the property contributed, and
- A statement that no goods or services were provided in exchange for the contribution.
You must obtain the acknowledgement by the time you file your tax return or, if earlier, by the due date for the return.
Obtain a qualified appraisal. You need to obtain an appraisal of the property’s fair market value. This is by far the most onerous requirement.
File IRS Form 8283. You must complete Section B of IRS Form 8283, Noncash Charitable Contributions, and attach it to your tax return. The charity must sign Part V of Section B, acknowledging receipt of the property; the charity’s signature does not mean it agrees with the appraised value. The appraiser must sign Part IV of Section B.

When is an appraisal required?

You must obtain an appraisal if you claim a charitable deduction of more than $5,000 for any single item of property or for multiple similar items of personal or real property. “Similar items” means property of the same generic category or type, such as stamps, coins, fine art, books, clothing, jewelry, furniture, household goods, collectibles, decorative art, land or buildings.

It makes no difference if you donate a group of similar items worth over $5,000 to one charity or to many different charities. For example, if you give books to three different schools and you deduct $2,000, $2,500 and $900, respectively, your claimed deduction is more than $5,000, and you must get a qualified appraisal for each book. You must also complete a Form 8283 for each school.

An appraisal is not required for certain types of readily valued property, such as the property listed below.

Publicly traded stock, mutual fund shares, or other securities. You can use the publicly available list price on the date of the donation; this is one reason donations of stock are extremely popular.
Vehicles (including cars, boats, or airplanes). Your deduction is limited to gross proceeds from the vehicle’s sale by the charity. The charity must provide you with an acknowledgement listing the sales proceeds within 30 days of the sale.
Business inventory held primarily or sale to customers.
Intellectual property, such as patents, trademarks, copyrights owned by persons other than the creator of the work, and trade secrets. Your deduction is limited to the lesser of fair market value or your basis in the property.

It might seem ridiculous, but digital assets such as Bitcoin are not categorized as publicly traded security for appraisal purposes, even though their prices are listed on exchanges and trading platforms. Thus, if the value of donated Bitcoin or other digital assets exceeds $5,000, you must obtain an appraisal.

When must the appraisal be completed?

Hire the appraiser early. The appraisal must be signed and dated by the due date of your return, plus extensions (October 15 at the latest for extended personal returns). Waiting until the last minute can be risky.

On the other hand, the appraisal can be completed no earlier than 60 days before the contribution date of the donated item. Thus, if you have an old appraisal for a donation, you can’t use it. You also can’t use insurance appraisals.

If you first claim a deduction for the property on an amended return, the qualified appraisal must be received before the date the amended return is filed.

Where the appraisal is performed after the contribution is made, the valuation effective date cannot be later than the date on which the contribution was made, or 60 days before that date.

Who can perform the appraisal?

To satisfy the IRS, the appraisals must be done by a “qualified” appraiser with verifiable education and experience in valuing the property involved. Appraisers are qualified if.

They have earned an appraisal designation from a generally recognized professional appraiser organization, or
They have completed professional or college-level course work in appraisal or an apprenticeship program, and have two or more years’ experience.

Note that most states don’t license appraisers other than real estate appraisers.

The person must generally prepare appraisals for which they are paid. The appraiser must be independent and not an employee of the donor or charity or related to them. The appraiser can’t have been a party to the transaction in which the donor acquired the item, unless the property is donated within two months of the date of acquisition and its appraised value is not more than its acquisition price.

It’s acceptable for the appraiser to regularly work for the donor or charity, but they must perform the majority of their appraisals for others.

You can find qualified appraisers through appraisal organizations such as:

American Society of Appraisers
The Appraisal Foundation
Appraisal Institute
Gemmological Institute of America
International Society of Appraisers
Appraisers Association of America

Who pays the appraiser?

The donor, not the charity, must pay the appraiser.

Moreover, donors can’t deduct appraisal fees as part of their charitable contribution. Nor may donors deduct such fees as a miscellaneous itemized deduction on Schedule A.

For obvious reasons, the appraisal fee cannot be based on a percentage of the appraised value of the property or the value of the property allowed as a charitable deduction. You should pay the appraiser a flat fee or an hourly rate.

What must the appraisal report contain?

The appraisal must be performed in accordance with generally accepted appraisal standards and contain the following information.

Description of the property and its physical condition
Date of the contribution
Terms of any restrictions on the use, sale, or other disposition of the property or of the right to income from it
Appraiser’s contact information
Appraiser’s qualifications, including background, experience, education and any membership in professional appraisal associations
Statement that the appraisal was prepared for income tax purposes
Date the property was valued
Declaration stating the appraiser understands that the report will be used for tax purposes and that he or she is subject to penalties if there is a substantial misstatement of the property’s value
Appraised fair market value on the date of the contribution
Method of valuation, such as the sales comparison approach, the cost approach or the income approach
Specific basis for the valuation, such as any specific sales transaction
Report completion date

For artwork, paintings in particular, the appraisal must include a professional-quality digital color image and a detailed description, including cost, provenance, exhibition history, comparable sales, and authenticity information. When the IRS audits art donations of over $50,000, it asks a board of art experts to review the donor’s appraisal. Thin art appraisals are asking for trouble.

The appraisal is not qualified if you fail to disclose or misrepresent facts and a reasonable person would expect that to cause a misstatement of value. Give the appraiser purchase documents, prior appraisals, repair records, condition issues, restrictions on user or resale, and anything unusual about the property.

What to do with the appraisal

You summarize the results of the appraisal when you complete Form 8283. Generally you don’t need to attach a copy of the appraisal report to your tax return. But there are exceptions. You do need to attach the appraisal to your return if

You claim a deduction of $20,000 or more for art donations
You claim a deduction of more than $500,000 for property donations of any kind, or
You claim a deduction for an easement or other restriction on the exterior of a building in a historic district

Be sure to keep a copy of the appraisal with your tax records.

Penalties for inflated appraisals

The IRS doesn’t have to accept your appraisal. It has its own appraisers and valuation specialists. If it determines that you underpaid your taxes because your appraisal inflated the value of donated property, it can impose tax penalties.

The penalty is 20 percent of the underpayment if the appraisal value was 150 percent or more of the item’s actual fair market value, and if you underpaid your taxes by $5,000 or more because of the inflated amount.

The penalty is a whopping 40 percent of the underpayment if the appraised value was 200 percent or more of the actual value.

FAQs

1. When is a qualified appraisal required?

You must obtain an appraisal if you claim more than $5,000 for any single item or multiple similar items of personal/real property.

2. Are digital assets like Bitcoin exempt from appraisal?

No. Bitcoin and other digital assets are NOT categorized as publicly traded securities for appraisal purposes, even though prices are listed on exchanges. If the donated Bitcoin exceeds $5,000, you must obtain an appraisal

3. Can I deduct appraisal fees?

No. Donors can’t deduct appraisal fees as part of the charitable contribution. Appraisal fees to be included miscellaneous itemized deduction on Schedule A

BergerCPAFirst, with over 35+ years of experience, offers comprehensive tax preparation services for individuals and businesses nationwide. Our commitment is to provide personalized attention while ensuring compliance and maximizing tax benefits. If you have any questions or would like to schedule a consultation, please call (201) 587-9200 or send us an inquiry.