The IRS imposes strict substantiation rules for claiming charitable deductions for property donations. For instance, if you donated appreciated property last year, you must attach a qualified appraisal for a deduction exceeding $5,000. Generally, you can claim a deduction equal to the property’s fair market value (FMV).
Strategy: Rely on a professional “qualified appraiser” for larger donations.
The Tax Court annals are littered with cases where deductions were reduced or denied due to a lack of a reputable independent appraisal. In a recent example, a physician who donated a dilapidated apartment building to charity lost out on a deduction worth hundreds of thousands of dollars. (Alli, TC Memo 2014-125)
The specific charitable donation appraisal requirements are spelled out in IRS Notice 2006-96. According to this ruling, a qualified appraiser must:
- Be certified by a professional organization or meet the education and experience requirements established by the IRS.
- Be familiar with evaluating the type of property being donated.
- Regularly offer appraisals in return for a fee.
- Comply with any other requirements in the applicable tax regulations.
Appraisers must declare that they meet the requirements for being a qualified appraiser. In addition, they can’t be barred from practice before the IRS in the three years preceding the appraisal.
Furthermore, appraisers must declare that they understand that they face civil penalties for inadequate appraisals.
Tip: These rules don’t apply to donations of publicly traded securities. Use the quoted market price to determine the FMV of the securities.