If you're planning to donate to charity, giving appreciated long-term capital gain property to charity can be a good tax move. You can get a full fair-market value deduction without ever paying taxes on the unrealized gain.
For publicly traded securities, all you need to do is report the appropriate information on Form 8238. If you want to donate something else, though - land, for example, or art - you have to jump through some hoops.
When you give property worth more than $5,000 other than publicly-traded securities, the tax law requires you to get a "Qualifed Appraisal"; the detailed requirements are listed below in the extended entry. The appraisal must be done no earlier than 60 days before the property is gifted and no later than the due date of the tax return for the year of the gift, including extensions.
Bruce and Marina Ney claimed deductions in 2001 of just over $210,306 for the donation of two parcels to the Delaware Agricultural Lands Preservation Foundation. The donation was part of a bargain sale; they claimed that the value of the property was in excess of the sales price by $210,306.
The taxpayers had appriasals to support the deduction. Unfortunately, they were either made in 2000, more than 60 days before the gift, or in 2005, long after the return was due.
The Tax Court ruled that no deduction was allowed. The taxpayers argued that it wasn't fair, that they really did make a donation, and that mere paperwork shouldn't get in the way of the deduction. The Tax Court's response is worth reading (citations are omitted):
Petitioners argue that denying them a deduction would be inequitable. Petitioners contend they donated something of value to DALPF and should not be denied a deduction for failing to comply with an arbitrary deadline.
We note, first, that we are not a court of equity and do not possess general equitable powers. "'There is no general judicial power to relieve from deadlines fixed by legislatures'".
Second, "'deadlines, like statutes of limitations, necessarily operate harshly and arbitrarily with respect to individuals who fall just on the other side of them'". Nevertheless, "'The legal system lives on fixed deadlines; their occasional harshness is redeemed by the clarity which they impart to legal obligation.'"
Furthermore, we note that petitioners had approximately 16 months in which to obtain a qualified appraisal. Petitioners have not explained why they were unable to secure a qualified appraisal within that period. Nor did petitioners "'fall just on the other side'" of the deadline... The 2000 appraisals were made more than 9 months before the date of contribution. The 2005 appraisals were made more than 3 years after the due date of petitioners' tax return. Thus, we are not faced with a situation where the taxpayer has done "all that can reasonably be expected of him".
Third, as mentioned supra, DEFRA section 155 is not primarily concerned with whether a charitable contribution has been made. Rather, DEFRA section 155 is concerned with substantiating the value of the contributed property. Id. Thus, even if petitioners made a charitable contribution, they must meet the substantiation requirements to claim a deduction.
In other words, if you make a charitable gift of property, you need to get the appraisal done right. No paperwork, no deduction.
Cite: Ney, T.C. Summary Opinion 2006-154.
Appraisal requirements, as described in Ney.
A. Qualified Appraisal
A qualified appraisal is an appraisal document that: (1) Relates to an appraisal that is made not earlier than 60 days before the date of contribution of the appraised property nor later than the due date of the return on which a deduction is first claimed; (2) is prepared, signed, and dated by a qualified appraiser; (3) includes a statement that the appraisal was prepared for income tax purposes; and (4) includes the appraised fair market value of the property on the date (or expected date) of contribution. Sec. 1.170A-13(c)(3)(i)(A), (B), (ii)(G), (I), (iv)(B), Income Tax Regs.
B. Qualified Appraiser
A qualified appraiser is an individual who includes on the appraisal summary a declaration that: (1) The individual either holds himself or herself out to the public as an appraiser or performs appraisals regularly; (2) the appraiser is qualified to make appraisals of the type of property being valued; and (3) the appraiser understands that an intentionally false or fraudulent overstatement of the value of the property described in the qualified appraisal or appraisal summary may subject the appraiser to a civil penalty under section 6701 for aiding and abetting an understatement of tax liability. Sec. 1.170A-13(c)(5)(i)(A), (B), (D), Income Tax Regs. An individual is not a qualified appraiser if the individual is the donor, the donee, any person employed by the donor or donee, or an appraiser who is regularly used by the donor or donee and who does not perform most of his or her appraisals for other persons. Sec. 1.170A13(c)(5)(iv)(A), (C), (D), (F), Income Tax Regs.
Qualified appraisal. -- The term "qualified appraisal" means an appraisal prepared by a qualified appraiser which includes --
(A) a description of the property appraised,
(B) the fair market value of such property on the date of contribution and the specific basis for the valuation,
(C) a statement that such appraisal was prepared for income tax purposes,
(D) the qualifications of the qualified appraiser,
(E) the signature and TIN of such appraiser, and
(F) such additional information as the Secretary prescribes in such regulations.
The items included in the Tax Update Blog are informational only and are not meant as tax advice. Consult with your tax advisor to determine how any item applies to your situation.
Joe Kristan writes the Tax Update items, and any opinions expressed or implied are not necessarily shared by anyone else at Roth & Company, P.C. Address questions or comments on Tax Updates to