| Pub. 561, Determining the Value of Donated Property |
2005 Tax Year |
Publication 561 - Main Contents
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:
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The cost or selling price of the item,
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Sales of comparable properties,
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Replacement cost, and
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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 buy 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 buy real property. Under the option, the
university could buy 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
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 reasonably
close to the date of contribution.
The cost or selling price is a good indication of the property's value if:
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The purchase or sale took place close to the valuation date in an open market,
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The purchase or sale was at “arm's-length,”
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The buyer and seller knew all relevant facts,
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The buyer and seller did not have to act, and
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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 1 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.
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The degree of similarity between the property sold and the donated property.
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The time of the sale—whether it was close to the valuation date.
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The circumstances of the sale—whether it was at arm's-length with a knowledgeable buyer and seller, with neither having to
act.
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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 1 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.
The facts are the same 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 1 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 1 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.
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.”
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. Factors That Affect FMV
| IF the factor you are considering is... |
THEN you should ask these questions... |
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cost or selling price
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Was the purchase or sale of the property reasonably close to the date of contribution?
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Was any increase or decrease in value, as compared to your cost, at a reasonable rate?
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Do the terms of purchase or sale limit what can be done with the property?
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Was there an arm's-length offer to buy the property close to the valuation date?
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sales of comparable properties
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How similar is the property sold to the property donated?
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How close is the date of sale to the valuation date?
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Was the sale at arm's-length?
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What was the condition of the market at the time of sale?
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replacement cost
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What would it cost to replace the donated property?
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Is there a reasonable relationship between replacement cost and FMV?
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Is the supply of the donated property more or less than the demand for it?
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opinions of experts
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Is the expert knowledgeable and competent?
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Is the opinion thorough and supported by facts and experience?
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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.
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 1 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 1 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. For more information about donations of patents,
see Patents,
later.
Valuation of Various Kinds of Property
This section contains information on determining the FMV of ordinary kinds of donated property. For information on appraisals,
see Appraisals,
later.
The FMV of used household goods, such as furniture, appliances, and linens, is usually much lower than the price paid when
new. Such used property
may have little or no market value because of its worn condition. It may be out of style or no longer useful.
If the property is valuable because it is old or unique, see the discussion under Paintings, Antiques, and Other Objects of Art.
Used clothing and other personal items are usually worth far less than the price you paid for them. Valuation of items of
clothing does not lend
itself to fixed formulas or methods.
The price that buyers of used items actually pay in used clothing stores, such as consignment or thrift shops, is an indication
of the value.
For valuable furs or very expensive gowns, a Form 8283 may have to be sent with your tax return.
Jewelry and gems are of such a specialized nature that it is almost always necessary to get an appraisal by a specialized
jewelry appraiser. The
appraisal should describe, among other things, the style of the jewelry, the cut and setting of the gem, and whether it is
now in fashion. If not in
fashion, the possibility of having the property redesigned, recut, or reset should be reported in the appraisal. The stone's
coloring, weight, cut,
brilliance, and flaws should be reported and analyzed. Sentimental personal value has no effect on FMV. But if the jewelry
was owned by a famous
person, its value might increase.
Paintings, Antiques, and Other Objects of Art
Your deduction for contributions of paintings, antiques, and other objects of art, should be supported by a written appraisal
from a qualified and
reputable source, unless the deduction is $5,000 or less. Examples of information that should be included in appraisals of
art objects—paintings
in particular—are found later under Qualified Appraisal.
Art valued at $20,000 or more.
If you claim a deduction of $20,000 or more for donations of art, you must attach a complete copy of the signed appraisal
to your return. For
individual objects valued at $20,000 or more, a photograph of a size and quality fully showing the object, preferably an 8
x 10 inch color photograph
or a color transparency no smaller than 4 x 5 inches, must be provided upon request.
Art valued at $50,000 or more.
If you donate an item of art that has been appraised at $50,000 or more, you can request a Statement of Value for
that item from the IRS. You must
request the statement before filing the tax return that reports the donation. Your request must include the following.
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A copy of a qualified appraisal of the item. See Qualified Appraisal, later.
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A $2,500 check or money order payable to the Internal Revenue Service for the user fee that applies to your request regarding
one, two, or
three items of art. Add $250 for each item in excess of three.
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A completed Form 8283, Section B.
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The location of the IRS territory that has examination responsibility for your return.
If your request lacks essential information, you will be notified and given 30 days to provide the missing information.
Send your request to:
Internal Revenue Service
Attention: Art Appraisal Services (AP:ART)
P.O. Box 27720
McPherson Station
Washington, DC 20038
Refunds.
You can withdraw your request for a Statement of Value at any time before it is issued. However, the IRS will not
refund the user fee if you do.
If the IRS declines to issue a Statement of Value in the interest of efficient tax administration, the IRS will refund
the user fee.
Authenticity.
The authenticity of the donated art must be determined by the appraiser.
Physical condition.
Important items in the valuation of antiques and art are physical condition and extent of restoration. These have
a significant effect on the value
and must be fully reported in an appraisal. An antique in damaged condition, or lacking the “ original brasses,” may be worth much less than a
similar piece in excellent condition.
Art appraisers.
More weight will usually be given to an appraisal prepared by an individual specializing in the kind and price range
of the art being appraised.
Certain art dealers or appraisers specialize, for example, in old masters, modern art, bronze sculpture, etc. Their opinions
on the authenticity and
desirability of such art would usually be given more weight than the opinions of more generalized art dealers or appraisers.
They can report more
recent comparable sales to support their opinion.
To identify and locate experts on unique, specialized items or collections, you may wish to use the current Official
Museum Directory of the
American Association of Museums. It lists museums both by state and by category.
To help you locate a qualified appraiser for your donation, you may wish to ask an art historian at a nearby college
or the director or curator of
a local museum. The Yellow Pages often list specialized art and antique dealers, auctioneers, and art appraisers. You may
be able to find a qualified
appraiser on the Internet. You may also contact associations of dealers for guidance.
Since many kinds of hobby collections may be the subject of a charitable donation, it is not possible to discuss all of the
possible collectibles
in this publication. Most common are rare books, autographs, sports memorabilia, dolls, manuscripts, stamps, coins, guns,
phonograph records, and
natural history items. Many of the elements of valuation that apply to paintings and other objects of art, discussed earlier,
also apply to
miscellaneous collections.
Reference material.
Publications available to help you determine the value of many kinds of collections include catalogs, dealers' price
lists, and specialized hobby
periodicals. When using one of these price guides, you must use the current edition at the date of contribution. However,
these sources are not always
reliable indicators of FMV and should be supported by other evidence.
For example, a dealer may sell an item for much less than is shown on a price list, particularly after the item has
remained unsold for a long
time. The price an item sold for in an auction may have been the result of a rigged sale or a mere bidding duel. The appraiser
must analyze the
reference material, and recognize and make adjustments for misleading entries. If you are donating a valuable collection,
you should get an appraisal.
If your donation appears to be of little value, you may be able to make a satisfactory valuation using reference materials
available at a state, city,
college, or museum library.
Stamp collections.
Most libraries have catalogs or other books that report the publisher's estimate of values. Generally, two price levels
are shown for each stamp:
the price postmarked and the price not postmarked. Stamp dealers generally know the value of their merchandise and are able
to prepare satisfactory
appraisals of valuable collections.
Coin collections.
Many catalogs and other reference materials show the writer's or publisher's opinion of the value of coins on or near
the date of the publication.
Like many other collectors' items, the value of a coin depends on the demand for it, its age, and its rarity. Another important
factor is the coin's
condition. For example, there is a great difference in the value of a coin that is in mint condition and a similar coin that
is only in good
condition.
Catalogs usually establish a category for coins, based on their physical condition—mint or uncirculated, extremely
fine, very fine, fine,
very good, good, fair, or poor—with a different valuation for each category.
Books.
The value of books is usually determined by selecting comparable sales and adjusting the prices according to the differences
between the comparable
sales and the item being evaluated. This is difficult to do and, except for a collection of little value, should be done by
a specialized appraiser.
Within the general category of literary property, there are dealers who specialize in certain areas, such as Americana, foreign
imports, Bibles, and
scientific books.
Modest value of collection.
If the collection you are donating is of modest value, not requiring a written appraisal, the following information
may help you in determining the
FMV.
A book that is very old, or very rare, is not necessarily valuable. There are many books that are very old or rare,
but that have little or no
market value.
Condition of book.
The condition of a book may have a great influence on its value. Collectors are interested in items that are in fine,
or at least good, condition.
When a book has a missing page, a loose binding, tears, stains, or is otherwise in poor condition, its value is greatly lowered.
Other factors.
Some other factors in the valuation of a book are the kind of binding (leather, cloth, paper), page edges, and illustrations
(drawings and
photographs). Collectors usually want first editions of books. However, because of changes or additions, other editions are
sometimes worth as much
as, or more than, the first edition.
Manuscripts, autographs, diaries, and similar items.
When these items are handwritten, or at least signed by famous people, they are often in demand and are valuable.
The writings of unknowns also may
be of value if they are of unusual historical or literary importance. Determining the value of such material is difficult.
For example, there may be a
great difference in value between two diaries that were kept by a famous person—one kept during childhood and the other during
a later period in
his or her life. The appraiser determines a value in these cases by applying knowledge and judgment to such factors as comparable
sales and
conditions.
Signatures.
Signatures, or sets of signatures, that were cut from letters or other papers usually have little or no value. But
complete sets of the signatures
of U.S. presidents are in demand.
Cars, Boats, and Aircraft
If you donate a car, a boat, or an aircraft to a charitable organization, its FMV must be determined.
Certain commercial firms and trade organizations publish monthly or seasonal guides for different regions of the country,
containing complete
dealer sale prices or dealer average prices for recent model years. Prices are reported for each make, model, and year. These
guides also provide
estimates for adjusting for unusual equipment, unusual mileage, and physical condition. The prices are not “official,” and these publications are
not considered an appraisal of any specific donated property. But they do provide clues for making an appraisal and suggest
relative prices for
comparison with current sales and offerings in your area.
These publications are sometimes available from public libraries or at a bank, credit union, or finance company. You can also
find pricing
information about used cars on the Internet.
An acceptable measure of the FMV of a car, boat, or airplane donated after June 3, 2005, is an amount not in excess of the
price listed in a used
vehicle pricing guide for a private party sale, not the dealer retail value, of a similar vehicle. However, the FMV may be
less than that amount if
the vehicle has engine trouble, body damage, high mileage, or any type of excessive wear. The FMV of a donated vehicle is
the same as the price listed
in a used vehicle pricing guide for a private party sale only if the guide lists a sales price for a vehicle that is the same
make, model, and year,
sold in the same area, in the same condition, with the same or similar options or accessories, and with the same or similar
warranties as the donated
vehicle.
Example.
You donate a used car in poor condition to a local high school for use by students studying car repair. A used car guide shows
the dealer retail
value for this type of car in poor condition is $1,600. However, the guide shows the price for a private party sale of the
car is only $750. The FMV
of the car is considered to be no more than $750.
Boats.
Except for inexpensive small boats, the valuation of boats should be based on an appraisal by a marine surveyor because
the physical condition is
so critical to the value.
More information.
If you donate a car, boat, or airplane after 2004, your deduction generally is limited to the gross proceeds from
its sale by the qualified
organization. This rule applies if the claimed value of the donated vehicle is more than $500. In certain cases, you can deduct
the vehicle's FMV. For
details, see Publication 526.
If you donate any inventory item to a charitable organization, the amount of your deductible contribution is the FMV of the
item, minus any gain
you would have realized if you had sold the item at its FMV on the date of the gift. For more information, see Publication
526.
To determine the FMV of a patent, you must take into account, among other factors:
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Whether the patented technology has been made obsolete by other technology;
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Any restrictions on the donee's use of, or ability to transfer, the patented technology; and
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The length of time remaining before the patent expires.
However, your deduction for a donation after June 3, 2004, of a patent or other intellectual property is its FMV, minus any
gain you would have
realized if you had sold the property at its FMV on the date of the gift. Generally, this means your deduction is the lesser
of the property's FMV or
its basis. For details, see Publication 526.
The value of stocks and bonds is the FMV of a share or bond on the valuation date. See Date of contribution, earlier, under What Is
Fair Market Value (FMV).
Selling prices on valuation date.
If there is an active market for the contributed stocks or bonds on a stock exchange, in an over-the-counter market,
or elsewhere, the FMV of each
share or bond is the average price between the highest and lowest quoted selling prices on the valuation date. For example,
if the highest selling
price for a share was $11, and the lowest $9, the average price is $10. You get the average price by adding $11 and $9 and
dividing the sum by 2.
No sales on valuation date.
If there were no sales on the valuation date, but there were sales within a reasonable period before and after the
valuation date, you determine
FMV by taking the average price between the highest and lowest sales prices on the nearest date before and on the nearest
date after the valuation
date. Then you weight these averages in inverse order by the respective number of trading days between the selling dates and
the valuation date.
Example.
On the day you gave stock to a qualified organization, there were no sales of the stock. Sales of the stock nearest
the valuation date took place
two trading days before the valuation date at an average selling price of $10 and three trading days after the valuation date
at an average selling
price of $15. The FMV on the valuation date was $12, figured as follows:
Listings on more than one stock exchange.
Stocks or bonds listed on more than one stock exchange are valued based on the prices of the exchange on which they
are principally dealt. This
applies if these prices are published in a generally available listing or publication of general circulation. If this is not
applicable, and the
stocks or bonds are reported on a composite listing of combined exchanges in a publication of general circulation, use the
composite list. See also
Unavailable prices or closely held corporations, later.
Bid and asked prices on valuation date.
If there were no sales within a reasonable period before and after the valuation date, the FMV is the average price
between the bona fide bid and
asked prices on the valuation date.
Example.
Although there were no sales of Blue Corporation stock on the valuation date, bona fide bid and asked prices were available
on that date of $14 and
$16, respectively. The FMV is $15, the average price between the bid and asked prices.
No prices on valuation date.
If there were no prices available on the valuation date, you determine FMV by taking the average prices between the
bona fide bid and asked prices
on the closest trading date before and after the valuation date. Both dates must be within a reasonable period. Then you weight
these averages in
inverse order by the respective number of trading days between the bid and asked dates and the valuation date.
Prices only before or after valuation date, but not both.
If no selling prices or bona fide bid and asked prices are available on a date within a reasonable period before the
valuation date, but are
available on a date within a reasonable period after the valuation date, or vice versa, then the average price between the
highest and lowest of such
available prices may be treated as the value.
Large blocks of stock.
When a large block of stock is put on the market, it may lower the selling price of the stock if the supply is greater
than the demand. On the
other hand, market forces may exist that will afford higher prices for large blocks of stock. Because of the many factors
to be considered,
determining the value of large blocks of stock usually requires the help of experts specializing in underwriting large quantities
of securities, or in
trading in the securities of the industry of which the particular company is a part.
Unavailable prices or closely held corporation.
If selling prices or bid and asked prices are not available, or if securities of a closely held corporation are involved,
determine the FMV by
considering the following factors.
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For bonds, the soundness of the security, the interest yield, the date of maturity, and other relevant factors.
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For shares of stock, the company's net worth, prospective earning power and dividend-paying capacity, and other relevant factors.
Other factors.
Other relevant factors include the goodwill of the business, the economic outlook in the particular industry, the
company's position in the
industry and its management, and the value of securities of corporations engaged in the same or similar business. For preferred
stock, the most
important factors are its yield, dividend coverage, and protection of its liquidation preference.
You should keep complete financial and other information on which the valuation is based. This includes copies of
reports of examinations of the
company made by accountants, engineers, or any technical experts on or close to the valuation date.
Restricted securities.
Some classes of stock cannot be traded publicly because of restrictions imposed by the Securities and Exchange Commission,
or by the corporate
charter or a trust agreement. These restricted securities usually trade at a discount in relation to freely traded securities.
To arrive at the FMV of restricted securities, factors that you must consider include the resale provisions found
in the restriction agreements,
the relative negotiating strengths of the buyer and seller, and the market experience of freely traded securities of the same
class as the restricted
securities.
Because each piece of real estate is unique and its valuation is complicated, a detailed appraisal by a professional appraiser
is necessary.
The appraiser must be thoroughly trained in the application of appraisal principles and theory. In some instances the opinions
of equally qualified
appraisers may carry unequal weight, such as when one appraiser has a better knowledge of local conditions.
The appraisal report must contain a complete description of the property, such as street address, legal description, and lot
and block number, as
well as physical features, condition, and dimensions. The use to which the property is put, zoning and permitted uses, and
its potential use for other
higher and better uses are also relevant.
In general, there are three main approaches to the valuation of real estate. An appraisal may require the combined use of
two or three methods
rather than one method only.
The comparable sales method compares the donated property with several similar properties that have been sold. The selling
prices, after
adjustments for differences in date of sale, size, condition, and location, would then indicate the estimated FMV of the donated
property.
If the comparable sales method is used to determine the value of unimproved real property (land without significant buildings,
structures, or any
other improvements that add to its value), the appraiser should consider the following factors when comparing the potential
comparable property and
the donated property:
-
Location, size, and zoning or use restrictions,
-
Accessibility and road frontage, and available utilities and water rights,
-
Riparian rights (right of access to and use of the water by owners of land on the bank of a river) and existing easements,
rights-of-way,
leases, etc.,
-
Soil characteristics, vegetative cover, and status of mineral rights, and
-
Other factors affecting value.
For each comparable sale, the appraisal must include the names of the buyer and seller, the deed book and page number, the
date of sale and selling
price, a property description, the amount and terms of mortgages, property surveys, the assessed value, the tax rate, and
the assessor's appraised
FMV.
The comparable selling prices must be adjusted to account for differences between the sale property and the donated property.
Because differences
of opinion may arise between appraisers as to the degree of comparability and the amount of the adjustment considered necessary
for comparison
purposes, an appraiser should document each item of adjustment.
Only comparable sales having the least adjustments in terms of items and/or total dollar adjustments should be considered
as comparable to the
donated property.
2. Capitalization of Income
This method capitalizes the net income from the property at a rate that represents a fair return on the particular investment
at the particular
time, considering the risks involved. The key elements are the determination of the income to be capitalized and the rate
of capitalization.
3. Replacement Cost New or Reproduction Cost Minus Observed Depreciation
This method, used alone, usually does not result in a determination of FMV. Instead, it generally tends to set the upper limit
of value,
particularly in periods of rising costs, because it is reasonable to assume that an informed buyer will not pay more for the
real estate than it would
cost to reproduce a similar property. Of course, this reasoning does not apply if a similar property cannot be created because
of location, unusual
construction, or some other reason. Generally, this method serves to support the value determined from other methods. When
the replacement cost method
is applied to improved realty, the land and improvements are valued separately.
The replacement cost of a building is figured by considering the materials, the quality of workmanship, and the number of
square feet or cubic feet
in the building. This cost represents the total cost of labor and material, overhead, and profit. After the replacement cost
has been figured,
consideration must be given to the following factors:
-
Physical deterioration—the wear and tear on the building itself,
-
Functional obsolescence—usually in older buildings with, for example, inadequate lighting, plumbing, or heating, small rooms,
or a
poor floor plan, and
-
Economic obsolescence—outside forces causing the whole area to become less desirable.
The FMV of any interest in a business, whether a sole proprietorship or a partnership, is the amount that a willing buyer
would pay for the
interest to a willing seller after consideration of all relevant factors. The relevant factors to be considered in valuing
the business are:
-
The FMV of the assets of the business,
-
The demonstrated earnings capacity of the business, based on a review of past and current earnings, and
-
The other factors used in evaluating corporate stock, if they apply.
The value of the goodwill of the business should also be taken into consideration. You should keep complete financial and
other information on
which you base the valuation. This includes copies of reports of examinations of the business made by accountants, engineers,
or any technical experts
on or close to the valuation date.
Annuities, Interests for Life or Terms of Years, Remainders, and Reversions
The value of these kinds of property is their present value, except in the case of annuities under contracts issued by companies
regularly engaged
in their sale. The valuation of these commercial annuity contracts and of insurance policies is discussed later under Certain Life Insurance and
Annuity Contracts.
To determine present value, you must know the applicable interest rate and use actuarial tables.
Interest rate.
The applicable interest rate varies. It is announced monthly in a news release and published in the Internal Revenue
Bulletin as a Revenue Ruling.
The interest rate to use is under the heading “ Rate Under Section 7520” for a given month and year. You can call the IRS office at 1-800-829-1040
to obtain this rate.
Actuarial tables.
You need to refer to actuarial tables to determine a qualified interest in the form of an annuity, any interest for
life or a term of years, or any
remainder interest to a charitable organization.
Use the valuation tables set forth in IRS Publications 1457 (Alpha Volume) and 1458 (Beta Volume). Both of these publications
provide tables
containing actuarial factors to be used in determining the present value of an annuity, an interest for life or for a term
of years, or a remainder or
reversionary interest. For qualified charitable transfers, you can use the factor for the month in which you made the contribution
or for either of
the 2 months preceding that month.
Publication 1457 also contains actuarial factors for computing the value of a remainder interest in a charitable remainder
annuity trust and a
pooled income fund. Publication 1458 contains the factors for valuing the remainder interest in a charitable remainder unitrust.
You can download
Publications 1457 and 1458 from
www.irs.gov. In addition, they are available for purchase via the
website of the U. S. Government Printing Office, by phone at (202) 512–1800, or by mail from the:
Superintendent of Documents
P.O. Box 371954
Pittsburgh, PA 15250-7954
Tables containing actuarial factors for transfers to pooled income funds may also be found in Income Tax Regulation
1.642(c)-6(e)(6), transfers to charitable remainder unitrusts in Regulation 1.664-4(e), and other transfers in Regulation
20.2031-7(d)(6).
Special factors.
If you need a special factor for an actual transaction, you can request a letter ruling. Be sure to include the date
of birth of each person the
duration of whose life may affect the value of the interest. Also include copies of the relevant instruments. IRS charges
a user fee for providing
special factors.
For more information about requesting a ruling, see Revenue Procedure 2005-1 (or annual update), 2005-1 I.R.B. 1.
Revenue Procedure 2005-1 is
available at
www.irs.gov/irb/2005-01_IRB/ar03.html#d0e100.
For information on the circumstances under which a charitable deduction may be allowed for the donation of a partial
interest in property not in
trust, see Partial Interest in Property Not in Trust, later.
Certain Life Insurance and Annuity Contracts
The value of an annuity contract or a life insurance policy issued by a company regularly engaged in the sale of such contracts
or policies is the
amount that company would charge for a comparable contract.
But if the donee of a life insurance policy may reasonably be expected to cash the policy rather than hold it as an investment,
then the FMV is the
cash surrender value rather than the replacement cost.
If an annuity is payable under a combination annuity contract and life insurance policy (for example, a retirement income
policy with a death
benefit) and there was no insurance element when it was transferred to the charity, the policy is treated as an annuity contract.
Partial Interest in Property Not in Trust
Generally, no deduction is allowed for a charitable contribution, not made in trust, of less than your entire interest in
property. However, this
does not apply to a transfer of less than your entire interest if it is a transfer of:
-
A remainder interest in your personal residence or farm,
-
An undivided part of your entire interest in property, or
-
A qualified conservation contribution.
Remainder Interest in Real Property
The amount of the deduction for a donation of a remainder interest in real property is the FMV of the remainder interest at
the time of the
contribution. To determine this value, you must know the FMV of the property on the date of the contribution. Multiply this
value by the appropriate
factor. Publications 1457 and 1458 contain these factors.
You must make an adjustment for depreciation or depletion using the factors shown in Publication 1459 (Gamma Volume). You
can use the factors for
the month in which you made the contribution or for either of the two months preceding that month. See the earlier discussion
on Annuities,
Interests for Life or Terms of Years, Remainders, and Reversions. You can download Publication 1459 from
www.irs.gov.
For this purpose, the term “depreciable property” means any property subject to wear and tear or obsolescence, even if not used in a trade or
business or for the production of income.
If the remainder interest includes both depreciable and nondepreciable property, for example a house and land, the FMV must
be allocated between
each kind of property at the time of the contribution. This rule also applies to a gift of a remainder interest that includes
property that is part
depletable and part not depletable. Take into account depreciation or depletion only for the property that is subject to depreciation
or depletion.
For more information, see section 1.170A-12 of the Income Tax Regulations.
Undivided Part of Your Entire Interest
A contribution of an undivided part of your entire interest in property must consist of a part of each and every substantial
interest or right you
own in the property. It must extend over the entire term of your interest in the property. For example, you are entitled to
the income from certain
property for your life (life estate) and you contribute 20% of that life estate to a qualified organization. You can claim
a deduction for the
contribution if you do not have any other interest in the property. To figure the value of a contribution involving a partial
interest, see
Publication 1457.
If the only interest you own in real property is a remainder interest and you transfer part of that interest to a qualified
organization, see the
previous discussion on valuation of a remainder interest in real property.
Qualified Conservation Contribution
A qualified conservation contribution is a contribution of a qualified real property interest to a qualified organization
to be used only for
conservation purposes.
Qualified organization.
For purposes of a qualified conservation contribution, a qualified organization is:
-
A governmental unit,
-
A publicly supported charitable, religious, scientific, literary, educational, etc., organization, or
-
An organization that is controlled by, and operated for the exclusive benefit of, a governmental unit or a publicly supported
charity.
The organization also must have a commitment to protect the conservation purposes of the donation and must have the resources
to enforce the
restrictions.
Conservation purposes.
Your contribution must be made only for one of the following conservation purposes.
-
Preserving land areas for outdoor recreation by, or for the education of, the general public.
-
Protecting a relatively natural habitat of fish, wildlife, or plants, or a similar ecosystem.
-
Preserving open space, including farmland and forest land, if it yields a significant public benefit. It must be either for
the scenic
enjoyment of the general public or under a clearly defined federal, state, or local governmental conservation policy.
-
Preserving a historically important land area or a certified historic structure. A historically important land area includes
an
independently significant land area, any land area in a registered historic district, and any land area next to a property
listed in the National
Register of Historic Places if its physical or environmental features contribute to the historic or cultural integrity of
the listed property.
A certified historic structure is any building, structure, or land area that is listed in the National Register, or is located
in a registered
historic district and is certified by the Secretary of the Interior as being of historic significance to the district.
There must be some visual public access to the property. Factors used in determining the type and amount of public access
required include the
historical significance of the property, the remoteness or accessibility of the site, and the extent to which intrusions on
the privacy of individuals
living on the property would be unreasonable.
Qualified real property interest.
This is any of the following interests in real property.
-
Your entire interest in real estate other than a mineral interest (subsurface oil, gas, or other minerals, and the right of
access to these
minerals).
-
A remainder interest.
-
A restriction (granted in perpetuity) on the use that may be made of the real property.
Valuation.
A qualified real property interest described in (1) should be valued in a manner that is consistent with the type
of interest transferred. If you
transferred all the interest in the property, the FMV of the property is the amount of the contribution. If you do not transfer
the mineral interest,
the FMV of the surface rights in the property is the amount of the contribution.
If you owned only a remainder interest or an income interest (life estate), see Undivided Part of Your Entire Interest, earlier. If you
owned the entire property but transferred only a remainder interest (item (2)), see Remainder Interest in Real Property, earlier.
In determining the value of restrictions, you should take into account the selling price in arm's-length transactions
of other properties that have
comparable restrictions. If there are no qualified sales, the restrictions are valued indirectly as the difference between
the FMVs of the property
involved before and after the grant of the restriction.
The FMV of the property before contribution of the restriction should take into account not only current use but the
likelihood that the property,
without the restriction, would be developed. You should also consider any zoning, conservation, or historical preservation
laws that would restrict
development. Granting an easement may increase, rather than reduce, the value of property, and in such a situation no deduction
would be allowed.
Example.
You own 10 acres of farmland. Similar land in the area has an FMV of $2,000 an acre. However, land in the general
area that is restricted solely to
farm use has an FMV of $1,500 an acre. Your county wants to preserve open space and prevent further development in your area.
You grant to the county an enforceable open space easement in perpetuity on 8 of the 10 acres, restricting its use
to farmland. The value of this
easement is $4,000, determined as follows:
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