Introduction
This publication is designed to help donors and appraisers
determine the value of property (other than cash) that is given to
qualified organizations. It also explains what kind of information you
must have to support the charitable contribution deduction you claim
on your return.
This publication does not discuss how to figure the amount of your
deduction for charitable contributions or written records and
substantiation required. See Publication 526, Charitable
Contributions, for this information.
Useful Items You may want to see:
Publication
- 526
Charitable Contributions
- 535
Business Expenses
Form (and Instructions)
- 8282
Donee Information Return
- 8283
Noncash Charitable Contributions
See How To Get More Information, near the end of this
publication, for information about getting these publications and
forms.
What Is Fair Market Value (FMV)?
To figure how much you may deduct for property that you contribute,
you must first determine its fair market value on the date of the
contribution.
Fair market value.
Fair market value (FMV) is the price that property would sell for
on the open market. It is the price that would be agreed on between a
willing buyer and a willing seller, with neither being required to
act, and both having reasonable knowledge of the relevant facts. If
you put a restriction on the use of property you donate, the FMV must
reflect that restriction.
Example 1.
If you give used clothing to the Salvation Army, the FMV would be
the price that typical buyers actually pay for clothing of this age,
condition, style, and use. Usually, such items are worth far less than
what you paid for them.
Example 2.
If you donate land and restrict its use to agricultural purposes,
you must value the land at its value for agricultural purposes, even
though it would have a higher FMV if it were not restricted.
Factors.
In making and supporting the valuation of property, all factors
affecting value are relevant and must be considered. These include:
- The cost or selling price of the item,
- Sales of comparable properties,
- Replacement cost, and
- Opinions of experts.
These factors are discussed later. Also, see Table 1 for
a summary of questions to ask as you consider each factor.
Date of contribution.
Ordinarily, the date of a contribution is the date that the
transfer of the property takes place.
Stock.
If you deliver, without any conditions, a properly endorsed stock
certificate to a qualified organization or to an agent of the
organization, the date of the contribution is the date of delivery. If
the certificate is mailed and received through the regular mail, it is
the date of mailing. If you deliver the certificate to a bank or
broker acting as your agent or to the issuing corporation or its
agent, for transfer into the name of the organization, the date of the
contribution is the date the stock is transferred on the books of the
corporation.
Options.
If you grant an option to a qualified organization to purchase real
property, you have not made a charitable contribution until the
organization exercises the option. The amount of the contribution is
the FMV of the property on the date the option is exercised minus the
exercise price.
Example.
You grant an option to a local university, which is a qualified
organization, to purchase real property. Under the option, the
university could purchase the property at any time during a 2-year
period for $40,000. The FMV of the property on the date the option is
granted is $50,000.
In the following tax year, the university exercises the option. The
FMV of the property on the date the option is exercised is $55,000.
Therefore, you have made a charitable contribution of $15,000
($55,000, the FMV, minus $40,000, the exercise price) in the tax year
the option is exercised.
Determining Fair Market Value
Determining the value of donated property would be a simple matter
if you could rely only on fixed formulas, rules, or methods. Usually
it is not that simple. Using such formulas, etc., seldom results in an
acceptable determination of FMV. There is no single formula that
always applies when determining the value of property.
This is not to say that a valuation is only guesswork. You must
consider all the facts and circumstances connected with the property,
such as its desirability, use, and scarcity.
For example, donated furniture should not be evaluated at some
fixed rate such as 15% of the cost of new replacement furniture. When
the furniture is contributed, it may be out of style or in poor
condition, therefore having little or no market value. On the other
hand, it may be an antique, the value of which could not be determined
by using any formula.
Cost or Selling Price of the Donated Property
Your cost of the property or the actual selling price received by
the qualified organization may be the best indication of its FMV.
However, because conditions in the market change, the cost or selling
price of property may have less weight if the property was not bought
or sold reasonably close to the date of contribution.
The cost or selling price is a good indication of the property's
value if:
- The purchase or sale took place close to the valuation date
in an open market,
- The purchase or sale was at arm's-length,
- The buyer and seller knew all relevant facts,
- The buyer and seller did not have to act, and
- The market did not change between the date of purchase or
sale and the valuation date.
Example.
Tom Morgan, who is not a dealer in gems, bought an assortment of
gems for $5,000 from a promoter. The promoter claimed that the price
was wholesale even though he and other dealers made similar
sales at similar prices to other persons who were not dealers. The
promoter said that if Tom kept the gems for more than one year and
then gave them to charity, Tom could claim a charitable deduction of
$15,000, which, according to the promoter, would be the value of the
gems at the time of contribution. Tom gave the gems to a qualified
charity 13 months after buying them.
The selling price for these gems had not changed from the date of
purchase to the date he donated them to charity. The best evidence of
FMV depends on actual transactions and not on some artificial
estimate. The $5,000 charged Tom and others is, therefore, the best
evidence of the maximum FMV of the gems.
Terms of the purchase or sale.
The terms of the purchase or sale should be considered in
determining FMV if they influenced the price. These terms include any
restrictions, understandings, or covenants limiting the use or
disposition of the property.
Rate of increase or decrease in value.
Unless you can show that there were unusual circumstances, it is
assumed that the increase or decrease in the value of your donated
property from your cost has been at a reasonable rate. For time
adjustments, an appraiser may consider published price indexes for
information on general price trends, building costs, commodity costs,
securities, and works of art sold at auction in arm's-length sales.
Example.
Bill Brown bought a painting for $10,000. Thirteen months later he
gave it to an art museum, claiming a charitable deduction of $15,000
on his tax return. The appraisal of the painting should include
information showing that there were unusual circumstances that justify
a 50% increase in value for the 13 months Bill held the property.
Arm's-length offer.
An arm's-length offer to buy the property close to the valuation
date may help to prove its value if the person making the offer was
willing and able to complete the transaction. To rely on an offer, you
should be able to show proof of the offer and the specific amount to
be paid. Offers to buy property other than the donated item will help
to determine value if the other property is reasonably similar to the
donated property.
Sales of Comparable Properties
The sales prices of properties similar to the donated property are
often important in determining the FMV. The weight to be given to each
sale depends on the following:
- The degree of similarity between the property sold and the
donated property.
- The time of the sale - whether it was close to the
valuation date.
- The circumstances of the sale - whether it was at
arm's-length with a knowledgeable buyer and seller, with neither
having to act.
- The conditions of the market in which the sale was
made - whether unusually inflated or deflated.
The comparable sales method of valuing real estate is explained
later under Valuation of Various Kinds of Property.
Example 1.
Mary Black, who is not a book dealer, paid a promoter $10,000 for
500 copies of a single edition of a modern translation of the Bible.
The promoter had claimed that the price was considerably less than the
retail price, and gave her a statement that the books had a
total retail value of $30,000. The promoter advised her that if she
kept the Bibles for more than one year and then gave them to a
qualified organization, she could claim a charitable deduction for the
retail price of $30,000. Thirteen months later she gave all the
Bibles to a church that she selected from a list provided by the
promoter. At the time of her donation, wholesale dealers were selling
similar quantities of Bibles to the general public for $10,000.
The FMV of the Bibles is $10,000, the price at which similar
quantities of Bibles were being sold to others at the time of the
contribution.
Example 2.
Assume the same facts as in Example 1, except that the promoter
gave Mary Black a second option. The promoter said that if Mary wanted
a charitable deduction within one year of the purchase, she could buy
the 500 Bibles at the retail price of $30,000, paying only
$10,000 in cash and giving a promissory note for the remaining
$20,000. The principal and interest on the note would not be due for
12 years. According to the promoter, Mary could then, within one year
of the purchase, give the Bibles to a qualified organization and claim
the full $30,000 retail price as a charitable contribution. She
purchased the Bibles under the second option and, 3 months later, gave
them to a church, which will use the books for church purposes.
At the time of the gift, the promoter was selling similar lots of
Bibles for either $10,000 or $30,000. The difference between the two
prices was solely at the discretion of the buyer. The promoter was a
willing seller for $10,000. Therefore, the value of Mary's
contribution of the Bibles is $10,000, the amount at which similar
lots of Bibles could be purchased from the promoter by members of the
general public.
Replacement Cost
The cost of buying, building, or manufacturing property similar to
the donated item should be considered in determining FMV. However,
there must be a reasonable relationship between the replacement cost
and the FMV.
The replacement cost is the amount it would cost to replace the
donated item on the valuation date. Often there is no relationship
between the replacement cost and the FMV. If the supply of the donated
property is more or less than the demand for it, the replacement cost
becomes less important.
To determine the replacement cost of the donated property, find the
estimated replacement cost new. Then subtract from this figure
an amount for depreciation due to the physical condition and
obsolescence of the donated property. You should be able to show the
relationship between the depreciated replacement cost and the FMV, as
well as how you arrived at the estimated replacement cost new.
Opinions of Experts
Generally, the weight given to an expert's opinion on matters such
as the authenticity of a coin or a work of art, or the most profitable
and best use of a piece of real estate, depends on the knowledge and
competence of the expert and the thoroughness with which the opinion
is supported by experience and facts. For an expert's opinion to
deserve much weight, the facts must support the opinion. For
additional information, see Appraisals, later.
Table 1.
Determining FMV
Problems in Determining Fair Market Value
There are a number of problems in determining the FMV of donated
property.
Unusual Market Conditions
The sale price of the property itself in an arm's-length
transaction in an open market is often the best evidence of its value.
When you rely on sales of comparable property, the sales must have
been made in an open market. If those sales were made in a market that
was artificially supported or stimulated so as not to be truly
representative, the prices at which the sales were made will not
indicate the FMV.
For example, liquidation sale prices usually do not indicate the
FMV. Also, sales of stock under unusual circumstances, such as sales
of small lots, forced sales, and sales in a restricted market, may not
represent the FMV.
Selection of Comparable Sales
Using sales of comparable property is an important method for
determining the FMV of donated property. However, the amount of weight
given to a sale depends on the degree of similarity between the
comparable and the donated properties. The degree of similarity must
be close enough so that this selling price would have been given
consideration by reasonably well-informed buyers or sellers of the
property.
Example.
You give a rare, old book to your former college. The book is a
third edition and is in poor condition because of a missing back
cover. You discover that there was a sale for $300, near the valuation
date, of a first edition of the book that was in good condition.
Although the contents are the same, the books are not at all similar
because of the different editions and their physical condition. Little
consideration would be given to the selling price of the $300 property
by knowledgeable buyers or sellers.
Future Events
You may not consider unexpected events happening after your
donation of property in making the valuation. You may consider only
the facts known at the time of the gift, and those that could be
reasonably expected at the time of the gift.
Example.
You give farmland to a qualified charity. The transfer provides
that your mother will have the right to all income and full use of the
property for her life. Even though your mother dies one week after the
transfer, the value of the property on the date it is given is its
present value, subject to the life interest as estimated from
actuarial tables. You may not take a higher deduction because the
charity received full use and possession of the land only one week
after the transfer.
Using Past Events to Predict the Future
A common error is to rely too much on past events that do not
fairly reflect the probable future earnings and FMV.
Example.
You give all your rights in a successful patent to your favorite
charity. Your records show that before the valuation date there were
three stages in the patent's history of earnings. First, there was
rapid growth in earnings when the invention was introduced. Then,
there was a period of high earnings when the invention was being
exploited. Finally, there was a decline in earnings when competing
inventions were introduced. The entire history of earnings may be
relevant in estimating the future earnings. However, the appraiser
must not rely too much on the stage of rapid growth in earnings, or of
high earnings. The market conditions at those times do not represent
the condition of the market at the valuation date. What is most
significant is the trend of decline in earnings up to the valuation
date.
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