Fair Market Value for Donations: How Much is Your Charitable Contribution Worth?
Altruistic taxpayers frequently contribute toward charitable causes and nonprofits to support the organizations’ activities. When the contributions are not cash, the taxpayer must accurately assess the value of the donated property to claim a charitable deduction when filing their taxes. Often, it is wise to engage a professional appraiser to determine the value of the donated property and assist in calculating the most accurate charitable deduction that the taxpayer can claim. Abrams Valuation Group, Inc. presents a helpful guide to determining the value of noncash charitable contributions.
What is Fair Market Value?
The IRS uses Fair Market Value as the standard of value when determining the amount a taxpayer can claim for a charitable deduction. Fair market value is defined as the price at which a willing buyer would buy an item under normal market conditions.
This means that even if you bought the item at an inflated price, or the item was very valuable when it was originally purchased, the value of the donated property will be determined by how much it can be sold for currently. Consequentially, the condition of the donated property will depend heavily on the condition of the items.
It is worthwhile to note that fair market value is different than other standards of value, so it is important to ensure that you (or your appraiser) are using the correct standard of value to appraise the charitable contributions.
What Types of Property Qualify as Deductible Charitable Contributions?
The IRS allows you to deduct the fair market value of most noncash charitable contributions, including commonly donated items like clothing, household goods, used furniture, shoes, and books. Less common items can include real estate, antiques and collectibles, firearms, and artwork, to name a few. Donated assets can be tangible (clothing or artwork) or intangible, such as stocks and bonds, patent rights, contracts, donor lists, or trade secrets. Valuing unique and antique items and intangible items is far more complex and is best left to a professional appraiser to avoid an IRS audit on the overstated value of donated property.
Can I Assess the Fair Market Value of My Charitable Contributions Myself?
Yes, generally, the IRS allows taxpayers to self-assess the fair market value of property donations under $5000. However, there are exceptions that may require a qualified appraisal even if the donation value is less than $5000. Most notably, if you are claiming a donation value for used furniture or clothing over $500, you would need an appraisal. It is crucial to be judicial in estimating the value of donated property on your own, as inflating the donation value for a charitable contribution deduction can easily trigger an IRS audit and may lead to penalties.
For property donations worth $5000 or more, the IRS requires a professional appraiser to assess the value of donated property. You won’t always have to submit the entire appraisal report along with your tax return, but you will need to keep it safely in your records, along with donation receipts. These records are vital to support your charitable deduction in case of an audit. For donations above $5000, you will also need to submit a Form 8283 for each beneficiary organization to which you donated property along with your tax return.
Factors to Consider in Determining Fair Market Value
As we mentioned earlier, you can generally determine the fair market value of property donations under $5,000 yourself. It’s important to consider the following factors when assessing the fair market value of your donation to ensure you do so accurately:
What is the condition of the donated property? Is it brand new, in good condition, or very well used?
How old is the item? Are items of this type considered more valuable (antiques) or less valuable (outdated clothing)?
How much are people generally willing to pay for similar items? Checking prices in thrift shops and online second-hand forums such as Ebay or Threadup may give insight into the fair market value of the items you donate.
Are you donating several similar items, or items that can be grouped in the same category? If the combined value of similar donated items totals more than $5000, you will need a professional appraisal.
If you are unsure about valuing your donation yourself, you can always engage a qualified appraiser to perform an appraisal, even if the value is less than $5000. This is an excellent “insurance policy” to ensure accuracy and avoid unwanted IRS scrutiny of your charitable deduction claim.
Types of Donations and Their Valuation
The types of items and assets that taxpayers can donate to charitable causes is highly varied. Here, AVGI highlights a few categories and how they are valued.
Clothing and Household Items
In order to qualify for a tax deduction, donated clothing or household items must be in “good used condition or better.” The IRS doesn’t provide guidelines to determine the condition of these items, but you can follow the guidelines from donation centers like Salvation Army along with your best judgment.
If you are claiming that a single article of clothing, furniture, or household item is worth more than $500, you will need a qualified appraisal, and you’ll need to file Form 8283 with your return. Similarly, you’ll need to get an appraisal for many items that fall under the same category if they total more than $5000 in value.
Vehicles
Special rules apply to donations of automobiles and other vehicles, so it’s essential to be informed when donating this type of property. You do not need a formal appraisal for a vehicle (including a car, boat, or airplane) if you obtained a CWA meeting the requirements of section 170(f)(12)(B), and your deduction is limited to the gross proceeds from the vehicle’s sale. For more details, see the IRS article on Tax Deductions for Charitable Contributions.
Real Estate
Real estate is complex to value, as there are many factors involved including the comparable sales of similar properties, zoning restrictions, the use or profit of the real estate (for example an apartment building that generates revenue from rent, agricultural land that produces profit from farming), among many other factors. Often, a detail about a piece of real estate can significantly increase or decrease its apparent value (read our real estate case study here). It is highly advisable to engage a professional real estate appraiser to determine the value of real estate donations to charitable causes.
Business Interests
Valuing a business and particularly an interest in a business is exceedingly complex, and necessitates professional assistance. An appraiser will take into account the business’s revenue, financial history, market position, sales of similar companies or business interests, among other factors to determine the value of the donated business interest.
Intangible Assests
This category can include (not a comprehensive list) life insurance policies, customer, donor, or membership lists and information, permits, and trade secrets. This is a highly complicated type of donation to value accurately, and is best done by a professional. Although the IRS does not require a qualified appraisal of certain intellectual property, such as patents, it is often in the donor’s best interests to obtain an appraisal, as the value of donated property may be much higher than they would have estimated on their own.
Best Practices for Donors
Here are some best practices for donors to follow when making noncash charitable contributions:
Consult a local tax advisor or appraiser if you are unsure how to value an item on your own.
If you are donating a unique or specialized collector’s item, try to obtain an appraisal from an expert in that area, as that will give you the most accurate valuation.
Keep organized and accurate records of your donations, including all receipts and appraisals.
Use the IRS guidelines and publications to ensure you are following the correct procedures for claiming a charitable contribution deduction.
Conclusion: How to Value Donations for Taxes
The IRS uses fair market value as the standard to determine the value of tax-deductible charitable contributions. If you are making a donation, it is crucial to understand how to assess the fair market value of your charitable contributions. Valuing donated items accurately ensures you can fulfill your tax obligations while benefitting from the largest tax deduction for your altruism.
Although you can assess the value of smaller donations on your own, it is often necessary to engage a qualified appraiser to accurately determine the fair market value of larger and more complex contributions. Many wise taxpayers rely on Abrams Valuation Group, Inc.’s 30 years of experience valuing businesses, business interests, and intangible assets for qualified donation appraisals. You can rely on our 99% audit avoidance rate to fulfill your tax obligations while maximizing your tax savings for your charitable contributions. Contact us for a zero-obligation consultation to discuss your donation value.
