Donating property? Get an appraisal. And it helps to get it on the property you donate.

February 5th, 2013 by Joe Kristan

20120801-2There are big tax advantages to donating appreciated capital gain property.  You get a charitable deduction for the full value of the property without ever paying tax on the appreciation.

There is lots of potential for abuse in valuing property, so the tax law lays out strict standards requiring “qualified appraisals” for most property donations over $5,000.  A taxpayer found out how strict yesterday in Tax Court.  Judge Holmes sets the stage:

Harvey Evenchik owned shares in a corporation known as the Chateau Apartments, Inc. Chateau’s sole assets were two apartment buildings — a 42-unit building known as the Chateau Apartments at 3666 East 2nd Street in Tucson, Arizona (Second Street), and a 10-unit complex at 3815 through 3821 East Lee Street, also in Tucson (Lee Street).

     Sometime in 2004 Harvey donated the approximately 72% of Chateau’s capital stock that he owned — 15,534.67 shares — to Family Housing Resources, Inc. (FHR), a nonprofit housing corporation.

Mr. Evenchik claimed a charitable deduction of $1,045,289 on his 2004 return — more than they could deduct.  The IRS challenged the carryover used on his 2006 return, saying the appraisal requirements hadn’t been met.  The Tax Court agreed that the taxpayer disclosures fell short, but then considered whether the taxpayers came close enough.  Unfortunately, the taxpayers valued the wrong asset.  Their appraisals covered the apartment units, but the taxpayer donated stock of the corporation owning the units — not the apartments themselves:

Commissioner is unable to determine whether the contributed property interest was overvalued. And the problem of misvalued property is so great that Congress was quite specific about what the charitably inclined have to do to defend their deductions.

So while close might have been good enough, this wasn’t close.

The Moral:  When you make a property donation — whether its real estate, art, or anything besides publicly-traded securities — you need an appraisal when the donation exceeds $5,000.  Make sure you get the appraisal done right.  If you wait until the IRS audits you, it’s too late.  And make sure the appraisal covers what you actually donate.

Cite: Estate of Evenchik, T.C. Memo 2013-344.

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