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Don’t lose your charitable tax deduction on use restrictions

It’s important to submit a qualified appraisal under IRS rules

By Eric Shadowens, CPA

When taxpayers contribute property to charitable institutions, they generally follow up by claiming a charitable deduction on their tax returns. But that deduction isn’t a given — you must comply with the IRS’s strict requirements. Many contributions, for example, require the donor to obtain, and possibly submit, a “qualified appraisal” of the donated property. The failure to do so can cost you the deduction and possibly lead to steep penalties. A Chicago couple learned this the hard way.

Case study

The couple owns a house listed on the National Register of Historic Places. In 2007, the National Park Service certified it as a “certified historic structure” for a charitable contribution for conservation purposes.

The couple decided to pursue a façade easement on the home. The donation of a historic façade easement in perpetuity to a qualified charitable organization entitles the donor to a charitable deduction for the easement’s value. The couple donated the easement to a nonprofit landmark preservation organization.

After an appraiser valued the easement at $108,000, the couple deducted that amount on their tax return. But when they attached IRS Form 8283, “Noncash Charitable Contributions,” they failed to include an appraisal.

The IRS subsequently rejected the entire deduction. It also imposed penalties of $10,770 due to the nearly $27,000 in tax underpayment that resulted once the deduction was denied. The couple appealed, but the U.S. Tax Court sided with the IRS.

The appraisal requirement

Generally, you must obtain a qualified appraisal for any contribution of property valued at more than $5,000. You needn’t submit the appraisal with your tax return, but you must complete Section B of Form 8283 (which draws on information found in an appraisal) and attach that form to your return. However, you must also submit an appraisal for property contributions of more than $500,000.

The IRS treats use restrictions that encumber certain properties differently, though. Under IRS rules, a donor who contributes a use restriction (such as the façade easement) that encumbers a certified historic structure in a registered historic district must include a qualified appraisal with the tax return for the year of the contribution.

The definition of a qualified appraisal

The law defines a qualified appraisal as one that:

  • Is prepared no earlier than 60 days before the date of contribution and no later than the due date (including extensions) of the tax return on which you claim the deduction,
  • Is prepared, signed and dated by a qualified appraiser,
  • Doesn’t base the appraisal fee on the appraised value, and
  • Includes the information required by the tax regulations.

When an appraisal is for a real estate donation, it must include a complete description of the property in sufficient detail to allow someone to identify the property even if they’re not familiar with it or the area. For example, it would be helpful to list the street address, legal description, lot and block number, physical features, condition, dimensions, zoning and permitted uses, the property’s actual use, and its potential for other higher and better uses. You may also wish to include photographs. Note that, in the case of a contribution of an easement — as in Gemperle v. Commissioner, discussed here — the requirements are more stringent.

A “qualified appraiser” is someone who has earned an appraisal designation from a recognized professional appraisal organization or satisfied certain minimum education and experience requirements. For real property, the appraiser must be licensed or certified for the type of property being donated in the state where the property is located.

Additionally, a qualified appraiser is someone who regularly prepares appraisals for pay and demonstrates verifiable education and experience in valuing the type of property appraised. The appraiser must also not have been prohibited from practicing before the IRS in the three years leading up to the appraisal date, and can’t receive fees based on a percentage of the appraised value.

Tread carefully

A small misstep can prove costly when it comes to charitable donations. You could end up on the hook for more taxes, plus penalties that range from 20% to 40% of your tax underpayment. Don’t let the failure to obtain a qualified appraisal trip you up.

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