Contributing assets to a trust can offer significant tax advantages. However, people gifting certain assets (including crypto, real estate, collectibles, or private business interests) will need an appraisal in order for the gift to qualify for a charitable tax deduction. This article explains what a qualified appraisal is, which assets require one, when it needs to be done, how it is prepared, and why it’s essential.
What is a Qualified Appraisal?
A qualified appraisal is a formal assessment of an asset’s fair market value. A qualified appraiser conducts the valuation, providing a report that verifies the asset’s worth. The appraisal is then attached to the taxpayer’s income-tax return. This allows the IRS to confirm the value of the donated asset.
Which Assets Must be Appraised?
The IRS requires a qualified appraisal any time a taxpayer claims a charitable deduction for a donated asset other than cash, bonds, or publicly traded stock. Assets that need to be appraised in order for a taxpayer to claim a charitable deduction include:
- Digital Assets: Although the market for digital assets like cryptocurrency is fairly liquid, these assets need to be formally appraised.
- Real Estate: Real estate must be appraised, as values can vary significantly based on the property’s character, location, and market conditions.
- Privately Held Business Interests: Interests in closely held corporations, partnerships, or limited liability companies require a formal valuation. An appraiser will analyze financial statements, assets, liabilities, and market conditions relevant to the business.
- Valuable Personal Property: Items such as artwork, jewelry, antiques, and collectibles need to be appraised. These items can be hard to value due to their unique characteristics and market trends.
- Intellectual Property: Patents, trademarks, copyrights, or other intellectual property also require a valuation based on factors like projected revenue, royalties, and market demand.
When Do You Need to Obtain a Qualified Appraisal?
The IRS mandates that appraisals be completed within a specific timeframe:
- Appraisal Timing: You don’t need an appraisal in order to donate an asset. You can get an appraisal later. But the appraisal should be dated as of the date that the property was transferred — or as close as possible to that date. So, for example, if you gift an asset on February 1, you can wait until June 1 to find an appraiser (though we recommend that you find an appraiser as soon as possible!), but the appraised value should be based on the property’s fair market value on or around February 1. The appraisal must be dated no earlier than 60 days before a transfer and no later than the due date for the gift tax return.
- Filing Deadline: The completed appraisal must be submitted with the donor’s tax return for the year in which the charitable contribution is claimed. So, for example, if a gift is made in July, the appraisal must be attached to the donor’s tax returns filed the following April 15. This filing helps validate the donation’s fair market value and the corresponding deduction amount.
Adhering to these timing requirements is crucial for the appraisal to be valid, as the IRS can disallow deductions based on out-of-date or improperly timed appraisals.
How are Qualified Appraisals Prepared?
The preparation of a qualified appraisal follows specific IRS guidelines to ensure compliance. Here’s an overview of the process:
- Hire Qualified Appraiser: The IRS requires a “qualified appraiser” to perform the appraisal. Qualified appraisers typically hold relevant certifications, licenses, and credentials and have experience valuing similar property types. If you need help finding an appraiser, Valur can recommend one.
- Appraise the Asset: The appraiser conducts a detailed analysis of the asset, considering factors like market conditions, historical performance, comparable sales, and unique characteristics. The valuation approach may vary based on the asset type; for example, real estate might be assessed based on comparable properties, while business interests could be evaluated based on cash flow and revenue projections.
- Appraisal Report: The appraiser provides a comprehensive report detailing the asset’s fair market value, methodology, and findings. The report should meet IRS standards, which include an explanation of the valuation methods used, a description of the asset, and supporting documentation like financial statements for business interests.
- File with Tax Return: The appraisal must be submitted with IRS Form 8283, “Noncash Charitable Contributions,” as part of the donor’s tax filing. This report is essential to substantiate the charitable deduction and prevent any issues during an IRS review.
Conclusion
By securing a qualified appraisal for assets like real estate, private business interests, and collectibles, you can establish the fair market value of your donation and qualify for a charitable deduction.
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