Taxpayers can avoid major capital gains exposure by gifting noncash assets to nonprofit organizations.
Donor-advised funds, in particular, have experienced a surge in noncash contributions by account holders, including privately held C or S corporation stock, real estate, insurance, vacation home, LP or LLC interests.
For example, Fidelity Charitable reported an 18% year-over-year increase in contributions of noncash assets in 2015.
However, donors and their advisors must ensure that they are doing the appropriate documentation of noncash gifts. Failure to do so can result in a gift being disallowed as a charitable deduction, and may incur penalties.
In a recent advisory, American Endowment Foundation said taxpayers must file Form 8283 for certain noncash contributions:
- $500 or more: Donor must include Form 8283 with his or her income tax return
- $5,000 or more ($10,000 for closely held stock): Donor will generally need to have the gift appraised and report the appraiser’s findings in Section B of Form 8283
- $500,000 or more: Donor must attach the qualified appraisal, along with Section B of Form 8283, to his or her tax return.
A tax easement donation case decided last year by the U.S. Tax Court underscores the importance of following these rules to the letter.
A Chicago area couple granted a façade easement to the Landmarks Preservation Council of Illinois on their century-old residence, which was listed on the National Register of Historic Places and located in a neighborhood designated as a historic district by the National Park Service.
Enter the Internal Revenue Service, which pays special attention to charitable deductions, according to AEF.
The court agreed with the IRS’ argument that the charitable deduction claimed by the couple should be disallowed because they failed to include a qualified appraisal of the easement with their return.
It also said they were liable for 20% penalties for disregarding the rules and regulations or, alternatively, for 40% penalties for making gross valuation misstatements on their jointly filed income tax returns.
AEF noted that the Internal Revenue Code, the instructions for Form 8283 and the commentary from the Joint Committee on Taxation’s Technical Explanation make clear that an appraisal should have been attached to the return.
In the Chicago case, the tax preparers and the donors failed to attach the appraisal to the tax forms as required — even though an appraisal had been completed.
AEF said that if a donor needs an appraisal for a noncash contribution, the gift must be made within 60 days after the date of the appraisal. Or it can be appraised after the date of the gift, in which case the appraisal would need to state the gift’s value on the date it was made.
In addition, the appraisal must be received by the due date (including extensions) of the return on which the deduction is first claimed.
According to AEF, a qualified appraisal is an appraisal document that is made, signed and dated by a qualified appraiser in accordance with generally accepted appraisal standards and otherwise complies with the qualified appraisal requirements.
For larger noncash gifts, both an appraisal and Section B of Form 8283 are required. Section B must be signed by the appraiser and by the charity that received the client’s gift, and must be attached to the donor’s tax return.
AEF said it is also important that the donor use an appropriate qualified appraiser.
This is an individual who has earned an appraisal designation from a professional appraiser organization, or has met minimum education and experience requirements in the subject matter in which he or she issues appraisals. A qualified appraiser regularly performs appraisals, and receives compensation for his or her work.
Generally, no part of the appraisal fee can be based on a percentage of the item’s appraised value, according to AEF. A fee is not a charitable gift. If itemized, the appraisal fee is deductible on the income tax return as a miscellaneous deduction.
According to AEF, a noncash gift may be more appropriate for some donors than a cash one. This can be determined by using its calculator.
— Check out NPT’s Heisman: Why Donor-Advised Funds Are Surging on ThinkAdvisor.