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Not-for-Profit Enews Update: Selling Property to a Tax-Exempt Organization for Less than Fair Market Value; Is there a Charitable Donation Amount and Do I Need an Appraisal?

by Amber Kocher, CPA, CGMA - Manager

March 13, 2014


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If an individual sells property to a qualified tax-exempt organization for less than the fair market value, can the individual claim a charitable contribution for the difference?

Yes. If a tax-exempt organization purchases property for less than its appraised fair market value, the individual can claim a charitable deduction for the remainder of the value. For example, if the organization pays $50,000 for property appraised at $60,000, the individual has made a charitable contribution of $10,000. The difference between the purchase price and fair market value of the property would be considered a charitable contribution to the individual.


When is an appraisal needed for donated property?

An appraisal is needed when the deduction to the individual will be greater than $5,000. Deductions between $5,000 and $500,000 do not require the appraisal to be attached to the individual’s tax return, but the appraisals should be kept with the tax records to support the deduction. Deduction amounts greater than $500,000 require the appraisal to be attached to the individual’s tax return. In the example above, the contribution results in a charitable deduction greater than $5,000; therefore, the individual must have a qualified appraisal completed by a qualified appraiser.


Do all donations need appraisals?

No, there are some exceptions which include the following:


- Non-publicly traded stock less than $10,000

- Vehicle for which deduction is limited to the gross proceeds of its sale

- Qualified intellectual property

- Certain publicly traded securities

- Certain qualified inventory contribution

- Stock in trade, inventory or property held for sale to customers in ordinary course of business


What is a qualified appraisal?

A respectable appraisal depends on completeness of the report, appraiser’s qualifications, and appraiser’s demonstrated knowledge of the donated property. Furthermore, the appraiser’s opinion is less valid than the facts; and “without the facts it is simply a guess”. Unreliable appraisals do not consider all facts, have an opinion not supported by facts, and/or have an opinion not consistent with the facts.


What is the time frame allowed for an appraisal?

A qualified appraisal must be completed, signed, and dated by a qualified appraiser within 60 days of the donation and before the due date of the tax return with extensions.


Can the appraisal fee be included as a charitable deduction?

No. If an individual is required to have an appraisal, the appraisal fees paid cannot be included in the charitable deduction. However, the fees may qualify as a miscellaneous deduction on Schedule A, subject to the 2% limit. Also, appraisal fees are not allowed to be based on a percentage of the property’s appraised value which could disqualify the appraisal itself.


What should be included in a qualified appraisal?

A reliable appraisal should include the following:


- Description of the property;

- Physical location;

- Date of the contribution;

- Terms of the agreement;

- Qualified appraiser’s name, address, and taxpayer identification number;

- Appraiser’s qualifications;

- Income tax purpose statement;

- Appraised FMV on the contribution date;

- Method of valuation; and,

- Valuation basis (facts and circumstances for determining the value).


Who is qualified to complete an appraisal?

A qualified appraiser must have an earned appraisal designation from a recognized professional appraiser organization and be licensed or certified in the state where the property is located. The individual must have a demonstrated competency in the type of property being valued and should have met the minimum education and experience requirements. Additionally, the appraiser must be regularly paid to prepare appraisals, must declare in the appraisal that he/she has the qualifications, and must not be prohibited from practicing before the IRS.


If the property is not real property (i.e. real estate), the individual(s) must have successfully completed college or professional-level course work; have at least 2 years of experience in the trade or business of buying, selling, or valuing this property; and must fully describe the education and experience qualification in the appraisal report.


Additionally, the appraiser cannot be the donor of the property, the donee of the property, a party to the transaction in which the donor acquired the property being appraised, or any person employed by, related to, or the “personal” appraiser for any of the preceding individuals.


What penalties could be assessed?

Penalties could be assessed on the appraiser if he or she knows or should have known the appraisal would be used in connection with a return or refund; and, overstates the appraisal amount leading to an individual’s 20% penalty. Additionally, civil penalties may be assessed to the appraiser for falsely or fraudulently overstating the value of the property.


Individuals claiming the deduction would be assessed a penalty for 20% of the underpayment of tax if the property’s value was 150% of the correct value and the underpayment of taxes was greater than $5,000. For more information or questions on donated property see IRS Publication 561 or contact your Blue Advisor.



If you have any questions regarding the article above or any other issue affecting your not-for-profit organization please contact your Blue & Co. advisor or e-mail us at blue@blueandco.com or call us at 800-717-BLUE.