United States: The IRS Is Watching Real Estate Donated To Charity

Last Updated: January 19 2016
Article by Justin L. Sylvan

Donating real property to a charity can both further your philanthropic goals and provide valuable tax deductions. However, the IRS imposes strict rules on charitable deductions that you must follow if you want to reap the tax savings you expect.

Qualified Appraisals

The IRS generally requires taxpayers to obtain a qualified appraisal for charitable deductions that exceed $5,000. You also must complete Form 8283, Section B, and attach it to your tax return. If you claim a deduction of more than $500,000, you also must attach the appraisal to your tax return.

For real estate, the appraisal must contain a complete description of the property. While "complete description" is not specifically defined, the IRS provides guidance that the description may include certain items. For instance, a complete description may include such details as street address; legal description; lot and block number; physical features; condition; dimensions; zoning and permitted uses; the property's actual use; and its potential use for other higher and better uses.

The appraisal also must include:

  • The donation date;
  • Terms of any agreement entered by, or on behalf of, the donor that relates to the use, sale or other disposition of the property;
  • The name, address and taxpayer identification number of the qualified appraiser (see the Sidebar, "Who's a 'Qualified Appraiser?'") and, if applicable, the same information for the person or partnership that employs the appraiser;
  • The appraiser's qualifications, including background, experience and memberships in professional appraisal associations;
  • A statement that the appraisal was prepared for income tax purposes;
  • The date(s) the property was valued;
  • The appraised fair market value (FMV) on the date of donation;
  • The method of valuation used to determine FMV; and
  • The specific basis for the valuation, such as any specific comparable sales transaction.

The appraisal itself must have been performed no earlier than 60 days preceding the date of donation. And, you must receive the appraisal report before the due date, including extensions, of the tax return on which the deduction is first claimed. If you are first claiming the deduction on an amended return, you must receive the appraisal before the date the amended return is filed.

Valuation Methods

An appraisal may require the combined use of two, or even all three, of these valuation methods:

Comparable Sales. This method compares the donated property with similar properties that have been sold. The sale prices — after adjustments for differences in date of sale, size, condition, location and other factors — indicate the estimated FMV of the donated property.

For each comparable sale, an appraisal must include the buyer's and seller's names; deed book and page number; date of sale; selling price; property description; amounts and terms of mortgages; property surveys; assessed value; and tax rate, along with the tax assessor's appraised FMV. The appraiser should also document each item of adjustment.

Capitalization of Income. The income method capitalizes the property's net income at a rate that represents a fair return on the particular investment at the particular time, considering the risks involved, such as nonpayment of rent.

Replacement Cost. This method is not typically used alone to determine FMV — it is instead used to support the value reached using other methods. Replacement cost is calculated by considering the materials, quality of workmanship and number of square feet in the building. Consideration is also given to physical deterioration, functional obsolescence and economic obsolescence. When this method is applied to improved real property, the land and improvements are valued separately.

Importance of Accuracy

Do not underestimate the importance of an accurate appraisal. If the value is understated, you will miss out on your full tax-saving opportunity.

If the value is overstated, and this causes you to underpay your tax by more than $5,000, you could be liable for a penalty on the resulting underpayment. A 20% penalty applies if the value or adjusted basis claimed is 150% or more of the correct amount. A 40% penalty applies if the value or adjusted basis claimed is 200% or more of the correct amount.

Tread Carefully

A charitable donation of real property can provide a significant tax deduction. Work with your tax advisor to ensure you do not make any missteps that could unnecessarily reduce or eliminate your deduction or subject you to underpayment penalties.

Sidebar: Who is a "Qualified Appraiser"?

A qualified appraisal must be made, signed and dated by a qualified appraiser who has either 1) Earned an appraisal designation from a recognized professional appraisal organization, or 2) Met certain minimum education and experience requirements. For real property, the appraiser must be licensed or certified for the type of property being appraised in the state where the property is located.

In addition, the appraiser must:

  • Regularly prepare appraisals for which he or she is paid;
  • Demonstrate verifiable education and experience in valuing the type of property being appraised; and
  • Not have been prohibited from practicing before the IRS at any time during the three-year period ending on the date of the appraisal.

Finally, a qualified appraiser may not receive fees based on a percentage of the appraised value.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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