IRS Publication 561 — Determining the Value of Donated Property
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“If there are no comparable sales, the FMV of the conserva- tion easement is generally determined indirectly as the difference between the FMVs of the property before and after the grant of the con- servation easement. The FMV of the property before the grant of the conservation easement must take into account not only the current use of the property but also an objective assess- ment of how immedi…”
The cost of the property to you 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 at a time that is 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 economic conditions in the open market did not change between the date of purchase or sale and the valuation date.
Example. Bailey 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 this dealer and other dealers made similar sales at similar prices to other persons who were not dealers. The promoter said that if Bailey kept the gems for more than 1 year and then gave them to charity, Bailey could claim a charitable contribution deduction of $15,000, which, according to the promoter, would be the value of the gems at the time of contribution. Bailey 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 Bailey donated them to charity. The best evidence of FMV depends on actual transactions and not on some artificial estimate. The $5,000 paid by Bailey 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. Corey Brown bought a painting for $10,000. Thirteen months later, Corey gave it to an art museum, claiming a charitable contribution deduction of $15,000 on their 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 Corey 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.
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