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Even benevolence requires timely attention and documentation

Most charitable gifts are made in cash.  It is easy to make a gift in cash, it is easy for the receiving charity to accept and use the gift, and the value of the gift for income tax deduction purposes is immediately known.  An in-kind or non-cash gift, such as a gift of real estate or stock, is usually not as easy to coordinate.  However, the hassles can be justified for in-kind gifts of appreciated assets because the tax-savings can be leveraged well beyond that of a simple cash gift.

As an example, assume that you would like to transfer $100,000 to your church.  You plan to fund the gift by selling publicly-traded stock worth $100,000 that you originally bought several years ago for $10,000.  You will sell the stock, deposit the funds into your checking account, and then cut a check to your church.   You will receive a charitable deduction of $100,000, but you will also recognize $90,000 of long-term capital gain from the sale of the stock (sales proceeds of $100,000, less $10,000 of cost basis).  The income taxes that you will owe on the capital gain will diminish your tax savings from the deduction for the charitable gift.  As an alternative, you could instead transfer the stock directly to your church.  You would receive an income tax charitable deduction of $100,000, the value of the stock.  The church could then sell the stock.  As a tax-exempt entity, it will not pay income taxes on the sale of the stock and receive the full $100,000 from the sale.  At the end of the day, your church has received $100,000, you have received an income tax charitable deduction of $100,000 for the gift of the stock, and neither you nor your church recognized taxable gain on the sale of the stock.  You have increased your tax benefit while maintaining the same economic result for your church.

In the example above, the value of the gifted stock and the corresponding charitable deduction is easy to determine.  The value of publicly-traded stock for income tax charitable deduction purposes is the average of the high and low trading values of the stock on the date of transfer.  This information can easily be found online.

If the gifted property is something other than publicly-traded securities, the fair market value is more difficult to determine.  Of course, the IRS is not going to let the donor unilaterally pick the value of the property and, as a result, the value of the donor’s income tax deduction.  Instead, the IRS will sometimes require an appraisal to substantiate the value of the gifted property and the corresponding income tax deduction.

When is an appraisal required?  If the claimed value of a non-marketable asset gifted to a charity exceeds $5,000, then an appraisal is required.  If an appraisal is required but not obtained, the penalty is nuclear.  The donor receives no income tax deduction for the gift.

Requirements of the Appraisal. An appraisal for this purpose must be a “qualified appraisal” and must be prepared by a “qualified appraiser.”   In order to be a qualified appraisal, the appraisal must be prepared in accordance with generally accepted appraisal standards and contain information about the property being appraised, the date or expected date of gift of the property, contact information for the appraiser, the qualifications of the appraiser, the conclusion of value, the methodology for reaching a conclusion of value, a statement acknowledging that the appraisal was prepared for income tax purposes and that the appraiser could be subject to penalties if there is a substantial or gross misstatement of value, and a dated signature by the appraiser.   If the gifted asset was a partial interest in property, the appraisal must specifically value the partial interest that was gifted.

The donor must disclose all relevant information to the appraiser in connection with the preparation of the appraisal.  If the donor fails to disclose a relevant fact or misrepresents a fact that a reasonable person would expect to change the appraised value, the appraisal is invalidated and the deduction would be lost.

A qualified appraiser is an appraiser with education and experience in valuing property of the same type as the gifted property.  The education component generally requires that the appraiser has completed a certain amount of relevant professional or collegiate coursework or has received a professional appraiser designation that required a demonstration of competency.  The qualified appraiser cannot be the donor, the receiving charity, or a related party.

Date of valuation.  If the appraisal is obtained after the gift is made, the date as of which the gifted property is valued must be the date of the gift.  If the appraisal is obtained prior to the gift, the date as of which that the property is valued must be a date that is no more than 60 days prior to the date of gift.  If an appraisal is obtained an