The familiar proverb “Don’t look a gift horse in the mouth” is good advice in many circumstances — but not when your nonprofit receives a generous gift of noncash property. In many such cases, your donor must provide an appraisal of the gift and your organization needs to report its value in your financial statements and on your Form 990.
All facts and circumstances
The IRS defines FMV as the price that a knowledgeable buyer is willing to pay a knowledgeable and willing seller for property, assuming neither party is obligated to buy or sell. For example, if a donor contributes used household goods, the FMV would be the price that typical buyers would actually pay for items of the same age, condition and use. Ultimately, FMV must consider all facts and circumstances connected with the property, such as its desirability, use and scarcity.
Several factors help determine a gift’s FMV, including its cost or selling price. The cost of the item to the donor or the actual selling price received by your organization may be the best indication of the item’s FMV. However, because market conditions can change, the cost or price becomes less important the further in time the purchase or sale was from the date of contribution. This is particularly true with certain goods such as technological devices, which become obsolete quickly.
A documented arm’s-length offer to buy donated property — for example, real estate — close to the contribution date may help prove its value to the IRS. But such an offer must have been made by an independent, unrelated party willing and able to complete the transaction.
The sale price of a property similar to the donated property, or a comparable sale, also helps determine FMV. The weight that the IRS gives to a comparable sale depends on the:
- Degree of similarity between the property sold and the donated property,
- Time of the sale,
- Circumstances of the sale (for example, was it made at arm’s length?), and
- Market conditions.
The two properties must be similar enough that reasonably well-informed buyers or sellers of the donated property would have considered buying it at the comparable property’s selling price. It’s important that the transactions not be between related parties, and be considered arm’s-length sales. The greater the number of similar sales for comparable selling prices, the stronger the evidence of the FMV.
FMV can consider the cost of buying, building or manufacturing property akin to the donated item. But the replacement cost must have a reasonable relationship with the FMV. And if the supply of the donated property is more or less than the demand for it, the replacement cost becomes less important to its value.
Donor and recipient responsibility
Professional appraisals are generally needed for property for which the donor will claim a deduction of more than $5,000 (except for such donations as publicly traded securities, intellectual property and business inventory). However, donors who deduct more than $500 for any single item of clothing or any household item that’s not in “good used condition” or better must include a qualified appraisal with their income tax return.
Donors should understand that the IRS will weigh the appraisal based on the report’s completeness and the appraiser’s qualifications and demonstrated knowledge of the donated property. Written appraisals must provide all facts applicable to giving an “intelligent judgment” of the property’s value, such as purchase price and comparable sales.
To avoid trouble from the IRS, handle noncash property donations carefully. Ensure that larger gifts are accompanied by a qualified appraisal — paid for by the donor. And if you receive more than $25,000 in noncash contributions, or gifts of art, historical items or conservation easements, include Schedule M, “Noncash Contributions,” with your 990. For more information, consult IRS Publication 561, Determining the Value of Donated Property.
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