On the Record: The Rules of Appraisals

Most donors know that if they want to make a contribution of property to a charitable organization, they must establish the value of the donated item in order to claim it as a deduction. And knowing what is necessary to support a claim might encourage a donor to actually make the donation.

This column is a brief review of the requirements governing donations of property, other than publicly traded securities, having a value in excess of $5,000.

For starters: When the value of donated property exceeds $5,000, the donor must obtain a “qualified appraisal” dated no earlier than 60 days before the date of the donation — and have it prepared, signed and dated by a qualified appraiser.

What is a qualified appraisal?
A qualified appraisal must describe the donated property and its physical condition, as well as the terms governing its use. It also must include the name, address and taxpayer identification number of the qualified appraiser and, if applicable, the name, address and taxpayer identification number of the company that employs or engages the appraiser.

What’s more, the qualified appraisal must include the appraiser’s qualifications, e.g., background, experience, education and membership in any professional appraisal associations. The appraisal also must state the date on which the property was appraised and that the appraisal itself was prepared expressly for income tax purposes.

Finally, the appraisal must indicate the fair market value of the property — on the date or expected date of the contribution — and the method and basis for how it was appraised.

Note: How the appraiser is compensated is a factor in determining whether the appraisal is a qualified appraisal. Briefly put, the appraised value of the donated property cannot be a factor in determining the fee received by the appraiser, nor can the amount of the deduction be a factor in determining the fee.

Who is a qualified appraiser?
A qualified appraiser obviously must be someone experienced in the field of appraisals and with knowledge of the property being appraised. The qualified appraiser cannot be:

• the donor claiming the deduction;

• the person or company who sold the donated property to the donor (unless the donation is made two months after the property was acquired and the appraised price does not exceed the purchase price);

• the charitable donee;

• anyone related to, married to or employed by the donor or the charity; or

• an appraiser who spends the majority of his or her time providing appraisals for the donor or the charity.

Remember, a qualified appraiser must declare on the appraisal that he holds himself out to the public as an appraiser; that he is qualified to make appraisals of the type of property being valued; that he is permitted to serve as an appraiser under the criteria listed above; and that he acknowledges the penalties for an intentionally false or fraudulent valuation.

A donor is not necessarily limited to one qualified appraisal, and if more than one is obtained, the donor can select which one will be used to support the deduction. However, if the donor uses more than one appraiser, or if more than one appraiser collaborate on a single appraisal, each must comply with the requirements set forth above, including signing the qualified appraisal and the appraisal summary.

What is an appraisal summary?
In addition to the qualified appraisal, a donor who claims a charitable deduction in excess of $5,000 for a donation of property must attach an appraisal summary to the return on which the deduction is claimed.

Basically, an appraisal summary is an overview of the qualified appraisal. It must include the name and tax identification number of the donor; a detailed description of the property and its physical condition; the appraised value of the property; the identity of the qualified appraiser; and an explanation of how the qualified appraiser was compensated.

The appraisal summary also must report how and when the donor created or acquired the property, and the donor’s tax basis in the property, as well as disclose the name, address and taxpayer identification number of the charitable donee and the date on which the charitable donee received the property.

The appraisal summary is made on Internal Revenue Service form No. 8283 and must be signed and dated by the donor, by the qualified appraiser and by a representative of the charity. (Note: The signature by the charity does not necessarily mean that it agrees with the appraised value of the property. It’s simply an acknowledgement of receipt of the property described in the appraisal summary. By signing, the donee acknowledges that it could be required to file an “Information Return” at some point in the future).

The information return
While the donor bears the burden of proof for establishing the value of property donated to an organization, as well as for obtaining a qualified appraisal, there also are certain duties imposed on the receiving organization.

The charity sometimes is required to file a Donee Information Return (form No. 8282) if it sells, exchanges or disposes of the property within two years of receipt. The return must be filed within 125 days after the charitable donee disposes of the donated property. A copy of the Information Return also must must be sent to the donor.

The purpose of the Donee Information Return is to ensure that the donated property was accurately valued by the donor. (A good indication that a donor might have overvalued property is a sale by the charitable donee shortly after receipt for substantially less than the amount claimed as a deduction.)

An Information Return is not required for the sale of an item valued at $500 or less or if the donated property is used or distributed by the charity in connection with its exempt purpose, e.g., cans of food donated to the local hunger-relief charity.

Kathleen Stephenson is of counsel with the Philadelphia office of Pepper Hamilton LLP. Lisa Petkun is a partner in the tax department of Pepper Hamilton. On the Record keeps readers up to date on the latest tax and planning issues pertaining to fundraising endeavors and charitable organizations.