Do I need an appraisal if I’m gifting real estate?

Do I need an appraisal if I’m gifting real estate?

Gifted Real Estate Must Meet IRS GuidelinesOne situation that many people don’t know that they need an appraisal for is when they gift real estate as a charitable donation. Gifting of real estate occurs when you give real estate to a person or entity and need to find out its fair market value in order to deduct this amount from your taxes. The rules regarding how you determine the deduction for this type of contribution is set by the Internal Revenue Service (IRS) and they require that the Fair Market Value be used instead of the Market Value.

Fair Market Value vs. Market Value

While the Fair Market Value and the Market Value can be similar in certain circumstances, the Fair Market Value is unique because it assumes that a hypothetical sale takes place as opposed to an actual sale that occurs with a Market Value appraisal. A major difference between the two is that the Fair Market Value does not consider actual costs associated during a real transaction so it is a gross value. The Market Value considers all of the expenses associate with a real sale, which would make it less than Fair Market Value.

When an appraisal is required

The IRS generally requires an appraisal if the value of the donated property is greater than $5,000. The appraiser must be familiar with appraisal principles and methodology and how to apply them in this type of assignment. As you know, in a residential assignment there are three approaches to value, the sale comparison, cost and income approach to value. Any of these approaches that are relevant to the assignment must be used. An example is the income approach to value. Many times in residential assignments this approach is not given consideration, however if the property is a rental then this approach must be considered and not omitted.

Qualified Appraisal

In order for the appraisal to be accepted by the IRS it must pass the following guidelines:

  • It must be signed and dated by a qualified appraiser per generally accepted appraisal guidelines
  • Must meet pertinent IRS guidelines
  • The appraisal cannot be made prior to 60 days before the contribution
  • It cannot include a prohibited appraisal fee (meaning the fee cannot be based on a percentage of the appraisal amount)
  • The appraisal must include a description of the property to make it easily identifiable, the physical condition must be described, the date of the contribution must be shown, and any terms or agreements with the donor must be disclosed
  • The name, address, and taxpayer identification number of the qualified appraiser should be included
  • The qualifications of the appraiser must be included
  • A statement that the appraisal was prepared for income tax purposes, and
  • The date of value and supporting data, including the relevant approaches to value must be included
Qualified Appraiser

The appraiser completing the assignment must have the following qualifications:

  • A designation from an appraisal organization or adequate education per state requirements to complete the assignment
  • Must be a full time appraiser
  • Documentation that verifies the appraiser’s qualifications
  • Cannot be prohibited from completing this type of assignment for the IRS
  •  Cannot be the donor or person claiming the tax deduction (in other words you cannot appraise your own property for the deduction)
  • Cannot be related to the donor

As you can see there are a lot of appraisal requirements for real estate that is donated as a gift. If you have any other questions that were not covered here pertaining to this type of appraisal assignment feel free to contact me.

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Comments

  1. Great post Tom. Something to add to the conversation is that the IRS does review appraisals and does not always take them at face value. If the IRS decides you (or the appraiser) overstated the value, then you could have to pay a penalty. This is another reason to pick your appraiser carefully.

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