If you donate property to charity, it’s critical that you comply with tax rules for substantiating the value of your gift. If you don’t, the IRS may deny your entire charitable deduction, even if your valuation is spot-on.

Qualified appraisal required

To deduct a donation of property (other than publicly traded securities) worth more than $5,000 ($10,000 for closely held stock), you’re required to have the property appraised by a qualified appraiser.

You must also file Form 8283, “Noncash Charitable Contributions,” with your federal tax return and have the appraiser sign the form’s Section B, Part III, “Declaration of Appraiser.” For property worth more than $500,000, you must also attach the appraisal report to your return.

A qualified appraiser is a professional who has earned an appraisal designation from a recognized professional organization or otherwise meets certain minimum education and experience requirements. The appraiser should also have appropriate education and experience in valuing the type of property being appraised. The tax regulations provide detailed requirements for qualified appraisals. Among other things, a qualified appraisal report must:

• Be prepared, signed and dated by a qualified appraiser other than the donor or donee,
• Relate to an appraisal conducted within 60 days before the contribution,
• Not involve a “prohibited appraisal fee,” and
• Provide certain information, including a description of the property and its physical condition, the actual or expected contribution date, the terms of any agreements that affect the property’s value, the appraiser’s identity and qualifications, the valuation date, and the methods and basis of valuation.

A prohibited appraisal fee is one that’s based on a percentage of the property’s appraised
value (or a percentage of the allowed deduction), with certain exceptions.

Dot the i’s and cross the t’s

The qualified appraisal requirement is one where form is just as important as substance. If you don’t follow the rules to the letter, you’ll likely lose valuable tax deductions regardless of whether the reported value is accurate. In the case of Mohamed v. Commissioner, a married couple learned this lesson the hard way.

In 2003 and 2004, the couple donated several pieces of real estate to a charitable remainder trust (CRT). The husband, a real estate broker and certified real estate appraiser, “self-appraised” the properties to be worth approximately $18.5 million. At the time, donations greater than $5,000 required an appraisal summary. (The requirement of an appraisal report for donations greater than $500,000 was added later.)

The husband filled out Form 8283 himself, admittedly without reading the instructions. Although he attached statements to the form containing information about the properties and their value, the statements didn’t qualify as appraisal summaries. The couple’s biggest problem, though, was that the husband wasn’t a qualified appraiser, because he was both the donor and — as trustee of the charitable trust — the donee.

Because the couple failed to adequately substantiate their donation, the Tax Court denied them any charitable deduction. After the IRS started its audit, an independent appraiser valued the properties at more than $20 million, but by then it was too late.

Get the deductions you deserve

If you plan to donate property to charity, discuss the appraisal requirements with your tax advisor. Why? Because, as you can see, just one mistake can wipe out otherwise legitimate tax benefits.

General Rules

For a contribution of cash, check, or other monetary gift, regardless of amount, you must maintain a bank record or a written communication from the donee organization showing its name, plus the date and amount of the contribution. Any other type of written record, such as a log of contributions, is insufficient.

For a contribution of property other than money, you generally must maintain a receipt from the donee organization that shows the organization’s name, the date and location of the contribution, and a detailed description (but not the value) of the property. If circumstances make obtaining a receipt impracticable, you must maintain a reliable written record of the contribution. The information required in such a record depends on factors such as the type and value of property contributed.

Contributions Over $250

If the contribution is worth $250 or more, stricter substantiation requirements apply. No charitable deduction is allowed for any contribution of $250 or more unless you substantiate the contribution with a written receipt from the donee organization. You must have the receipt in hand when you file your return (or by the due date, if earlier) or you won’t be able to claim the deduction. If you make separate contributions of less than $250, you won’t be subject to the written receipt requirement, even if the sum of the contributions to the same charity total $250 or more in a year.

The receipt must set forth the amount of cash and a description (but not the value) of any property other than cash contributed. It must also state whether the donee provided any goods or services in return for the contribution, and if so, must give a good faith estimate of the value of the goods or services. If you received only “intangible religious benefits,” such as attending religious services, in return for your contribution, the receipt must say so. This type of benefit is considered to have no commercial value and so doesn’t reduce the charitable deduction available.

Contributions Over $500

In general, if the total charitable deduction you claim for non-cash property is more than $500, you must attach a completed Form 8283 (Noncash Charitable Contributions) to your return or the deduction is not allowed. In general, you are required to obtain a qualified appraisal for donated property with a value of more than $5,000, and to attach an appraisal summary to the tax return. However, a qualified appraisal isn’t required for publicly-traded securities for which market quotations are readily available. A partially completed appraisal summary and the maintenance of certain records are required for (1) nonpublicly-traded stock for which the claimed deduction is greater than $5,000 and no more than $10,000, and (2) certain publicly-traded securities for which market quotations are not readily available. A qualified appraisal is required for gifts of art valued at $20,000 or more. IRS may also request that you provide a photograph.

Recordkeeping for Contributions for which You Receive Goods or Services

If you receive goods or services, such as a dinner or theater tickets, in return for your contribution, your deduction is limited to the excess of what you gave over the value of what you received. For example, if you gave $100 and in return received a dinner worth $30, you can deduct $70. But your contribution is fully deductible if:

• you received free, unordered items from the charity that cost no more than $10.20 in 2013 ($9.90 in 2012) in total;
• you gave at least $51 in 2013 ($49 in 2012) and received only token items (bookmarks, key chains, calendars, etc.) that bear the charity’s name or logo and cost no more than $10.20 in 2013 ($9.90 in 2012) in total; or
• the benefits that you received are worth no more than 2% of your contribution and no more than $102 in 2013 ($99 in 2012).

If you made a contribution of more than $75 for which you received goods or services, the charity must give you a written statement, either when it asks for the donation or when it receives it, that tells you the value of those goods or services. Be sure to keep these statements.

Cash Contribution Made through Payroll Deductions

You can substantiate a contribution that you make by withholding from your wages with a pay stub, Form W-2, or other document from your employer that shows the amount withheld for payment to the charity. You can substantiate a single contribution of $250 or more with a pledge card or other document prepared by the charity that includes a statement that it doesn’t provide goods or services in return for contributions made by payroll deduction.

The deduction from each wage payment is treated as a separate contribution for purposes of the $250 threshold.

Substantiating Contributions of Services

Although you can’t deduct the value of services you perform for a charitable organization, some deductions are permitted for out-of-pocket costs you incur while performing the services. You should keep track of your expenses, the services you performed and when you performed them, and the organization for which you performed the services. Keep receipts, canceled checks, and other reliable written records relating to the services and expenses.

As discussed earlier, a written receipt is required for contributions of $250 or more. This presents a problem for out-of-pocket expenses incurred in the course of providing charitable services, since the charity doesn’t know how much those expenses were. However, you can satisfy the written receipt requirement if you have adequate records to substantiate the amount of your expenditures, and get a statement from the charity that contains a description of the services you provided, the date the services were provided, a statement of whether the organization provided any goods or services in return, and a description and good-faith estimate of the value of those goods or services.

Please call us if you have any questions about these rules. Together we can make sure that you’ll get all the deductions to which you are entitled when we prepare your 2013 tax returns..