Appraising Fine Art & Personal Property for Tax Purposes
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Tax season is just around the corner.
It's time to think about filing for a deduction for the donations you made last year. You must provide the Internal Revenue Service with a specific type of appraisal to satisfy their requirements.
You should consider:
1) When do I need a tax appraisal for donating personal property?
2) How does the appraiser determine the value for the deduction?
3) Can the IRS determine a different value for the deduction?
4) Is the IRS likely to examine appraisal?
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1) When do I need a tax appraisal?
To be eligible for a tax deduction, you must donate your (non-cash) object to a "qualified organization" that is a 501c3, public tax-exempt organization, such as an museum. Furthermore, the object must directly correspond to the organization's mission. Donating a work of French art to a French art museum would qualify, but donating the piece to a fire station would not. However, a painting of a fire station would potentially qualify for the deduction. Because this qualification is open to interpretation, it is advisable to consult with your appraiser about your plans.
Generally, the IRS requires an appraisal report be attached to your return for objects having a Fair Market Value exceeding $20,000.00.
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2) How does the appraiser determine the value for the deduction?
An appraisal of an art or antique item for tax purposes typically uses "Fair Market Value." Fair Market Value is defined at the price at which that object would be exchanged for cash between a willing buyer and a willing seller, with all relevant facts known, in an open market and approximately around the date of the donation's acceptance. The appraisal must be authorized by a "qualified appraiser." A "qualified appraiser" is defined by the IRS as one who has either earned a designation from the one of the professional accreditation societies (i.e. ASA, AAA), or has regularly conducted such professionally paid appraisals, and has met education and experience requirements.
The appraiser will research the appropriate marketplace(s) where the items are typically traded and analyze documented comparable sales. If the appropriate marketplace is auction, the sales price would include the buyer's premium.
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3) Can the IRS determine a different value for the deduction?
Yes. Should the donee institution choose to sell the art/personal property within three years of the donation, the Fair Market Value may change to a lesser or greater amount. The donor might be legally bound to pay back taxes to cover any difference. A good appraiser can work with a client and an institution to ensure that the recipient organization agrees not to sell the collection within the minimum period to protect you from this risk.
The Internal Revenue Service, of course, has its own system to judge the value of a personal property donation. Any submitted appraisal is subject for review by its Art Advisory Panel. This panel is composed of experts in the art and trade, such as appraisers, dealers, and curators. They too can change your deduction. If the Art Advisory Panel finds your appraisal to be significantly over-valued (or under-valued, in the case of estate taxes), you can be subject to hefty fines.
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4) Is the IRS likely to examine the appraisal?
The likelihood of the IRS examining an appraisal in depth depends on the donation itself and your own audit risk factors. For donations of $20,000 or over, the IRS may review your appraisal. For significant donations claiming more than $50,000.00, you can expect the review. For gifts less than $5,000, it is a much slimmer chance.
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While fine art donations can be complicated, they are frequently a profitable way to maintain your legacy while saving money. With a qualified appraiser lending their assistance, gifting becomes a simple matter for the donor. We hope these guidelines for tax appraisals for fine art and personal property donations are helpful as April 15th gets closer.
Carpe Diem!
Lynn Magnusson, ASA, AAA
Co-Authors: Lynn Magnusson, ASA, AAA and Becky Lipnick, Communications Coordinator
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