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Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Qualified Appraisal

What it is:

A qualified appraisal is a document that formally describes and estimates the value of a piece of property.

How it works (Example):

Assume that John wants to donate a painting to his favorite charity. He believes the painting is worth $20,000. Instead of simply putting a $20,000 deduction on his tax return for the year, John obtains a qualified appraisal of the painting. The appraisal places the value of the painting at $22,000. John files IRS Form 8283 with his tax return and deducts $22,000.

The IRS has very specific rules about qualified appraisals. For example, appraisal documents must be created no earlier than 60 days before the date of the gift or no later than the due date of the tax return. The appraiser must be a professional appraiser (meaning the person must have a professional designation, perform appraisals regularly, meet certain education requirements, and meet other guidelines) and can't be the donor, the donee, anyone party to the acquisition of the property, or an employee or relative of anyone involved. 

IRS Form 8283 is the appraisal summary, and anyone who claims a charitable contribution deduction of property worth more than $5,000 must provide this form with his or her tax return in order to receive a deduction. The charity must sign the Form 8283 to acknowledge that it received the donation at the appraised value. Donations of cash or publicly traded securities are excluded from this form, as are nonpublicly traded stock, intellectual property (such as a patent), some types of inventory, and sometimes vehicles. 

Though the appraiser is allowed to charge a fee for the appraisal, the fee cannot be based on a percentage of the value of the property appraised. The cost of the appraisal itself is also not deductable as a charitable contribution, though it might be deductible elsewhere depending on the donor's tax situation. Sometimes charities pay the appraisal fee, but some types of charities are restricted from doing so.

Why it Matters:

Though donating to good causes is one of life's pleasures, it's also an opportunity to engage in tax fraud. Thus, the IRS requires people who want to deduct certain large charitable donations to obtain qualified appraisals for those items. Qualified appraisals ensure that the donor is not deducting too much or too little. The IRS can impose penalties of 40% for a gross misstatement of a donation (and even a 20% penalty for just a "substantial" misstatement), and it can also penalize the appraisers involved in the misstatement.