Ask an Instructor: Limitations on Charitable Contribution Appraisals and on Art Donations
Tuesday, October 13, 2020 in Ask an Instructor
Question 1: I understand that the effective date for a non-cash charitable contribution appraisal is the date of donation and that an appraisal cannot be done any earlier than 60 days prior to donation, but is there a limit to when an appraisal can be done after the donation?
You are correct. The effective date is the date of the donation, and the appraisal cannot be made more than 60 days prior to the date of the donation. After the donation, the appraisal must be made no later than the due date of the tax return, including extensions, on which the deduction is first claimed. See IRS Regulations 1.170A-17(a)(4). The due date can vary depending on the client’s situation. Typically, if a donation is made at any time during the year, then the deadline for the taxpayer to submit the appraisal with their tax forms is April 15th of the following year. But, the taxpayer may have the option to file for a six-month extension, so it could be that your client’s tax deadline is not until October 15th. There may also be the possibility of the taxpayer filing an amended return to account for a donation made in the past. In this case, the taxpayer should consult a professional tax advisor for more information and deadlines.
Question 2: I have a question pertaining to artists or in this case, spouses of artists donating their works. I understand an artist cannot receive a full fair market value tax deduction for an artwork he or she created, only a deduction for materials. However, what about the artist’s spouse donating their deceased spouse's artworks? Is the spouse limited to the same deduction?
Excellent question, and one that I’m asked frequently. Art is deemed ordinary income property if the donor created it or if the donor received it as a gift from the artist who created it. If the property is ordinary income property, then the donor is limited to the lesser of fair market value or the cost basis (i.e. cost of materials). The key point to your question is that the artist is deceased. As such, the property is no longer considered ordinary income after it passes through the estate. The estate receives a step-up in basis, and the spouse (assuming the spouse is the new owner after the estate settled) can then donate the property and potentially receive a deduction for the full fair market value, assuming that all of the other criteria for the donation is met. Remember that appraisers are not tax advisors. Our job is to determine the fair market value of the property as of the date of the donation. If your client has questions about donating property that may or may not be considered ordinary income property, the best practice is to refer the client to their professional tax advisor for clarification. Don’t worry about talking your client out of potential appraisal work. Even if the property is deemed ordinary income property, then an appraisal may still be needed, as the IRS will want to know the fair market value as well as the cost basis in order to determine which of the two is the lesser.