Donating non-cash property to charity can provide a valuable charitable tax deduction. In many cases, you may deduct the property’s fair market value on the date of the donation. However, the IRS closely scrutinizes these deductions because of past abuses involving inflated valuations.
If you claim a charitable deduction of more than $5,000 for a single item—or for multiple similar items of property—you must comply with strict IRS substantiation rules. Similar items mean property of the same generic type. Failure to follow these rules can cause the IRS to completely deny your deduction, even if the donation itself was legitimate.
To protect your deduction, you generally must complete three steps:
1. Obtain a written acknowledgment from the charity describing the donated property and confirming whether you received anything in return. This must be a contemporaneous letter (at the time of the donation – and before the filing of the return or its due date, whichever is earlier).
2. Obtain a qualified appraisal from an independent qualified appraiser. Note that the cost of the appraisal cannot be taken as a deduction of any type.
3. File IRS Form 8283 with your tax return, including signatures from both the appraiser and the charity. The actual appraisal report is generally not required to be filed with the return. There are exceptions, however, such as deductions of $20,000 or more for art donations, or more than $500,000 for any type of property.
The appraisal requirement often creates the most problems. The appraisal must be completed no earlier than 60 days before the donation and no later than the due date of your tax return, including extensions. You cannot use an old appraisal or an insurance appraisal.
The appraiser must have appropriate education and experience valuing the specific type of property involved and must regularly perform paid appraisals. The appraiser also must remain independent. The appraiser must be paid by the donor – not by the charity. There are specific requirements concerning what the appraisal must contain. Be sure to research those requirements if you are seeking an appraisal.
Importantly, these appraisal rules also apply to digital assets such as Bitcoin and other cryptocurrencies, even though they trade on public exchanges.
An appraisal is not required for certain types of property with a readily determined value, such as: (a) publicly traded stock; (b) vehicles (including boats and airplanes – the deduction is limited to the proceeds received by the charity from the sale of the property; (c) business inventory held for sale to customers; (d) intellectual property owned by persons other than the creator – the deduction is the lesser of the basis in the property or its fair market value.
If you first claim a deduction on an amended return, the appraisal has to be received before the filing of the amended return.
The IRS may impose substantial penalties for inflated appraisals, including penalties of 20 percent of the resulting tax underpayment, or even 40 percent in serious cases (where the appraised value was 200 percent or more of the actual value).