Getting to the Root of Correctly
Donating Appreciated Property to Charity
tax law imposes stringent requirements for deducting charitable
gifts of property, and they are especially tough when
appreciated property is donated. Failing to observe all of the
rules can reduce or eliminate the tax deduction.
The recent U.S. Tax Court case of Mohamed v. Commissioner
dramatically illustrates the roots of potential issues. The
taxpayer donated property worth tens of millions of
dollars—which the IRS readily acknowledged—yet his final
deduction was zero because he’d failed to obtain an independent
Meeting Requirements to Reap Tax Benefits
When property that would have qualified for long-term capital
gains treatment if sold—in other words, the property has been
owned for more than one year— is donated, then it’s generally
allowable to deduct an amount equal to the property’s fair
market value (FMV). Conversely, if the property has been held
for a year or less, then the deduction is limited to the
taxpayer’s basis (generally, the original cost of the property).
This situation provides a unique planning opportunity for some
taxpayers. Notably, property that has significantly appreciated
in value can be contributed—such as real estate or
securities—and then a large deduction based on the FMV may be
claimed. The appreciation in value in the property remains
Generally, the current charitable deduction for appreciated
property can reach up to 30% of a taxpayer’s adjusted gross
income (AGI). There is an overall limit of 50% of AGI for all
charitable (cash and noncash) deductions. Any remainder above
these limits may be carried forward for up to five years.
However, the tax law imposes several other requirements when
property is given to charity. These include:
• If tangible personal property is donated that isn’t used to
further the charity’s tax-exempt function, then the deduction is
limited to the taxpayer’s basis in the property.
• An IRS requirement for a written description of property
valued at more than $500.
• If a taxpayer claims a deduction exceeding $5,000 (or $10,000
for closely-held stock), then an independent written appraisal
must be obtained-except for donations of money or publicly
traded securities. Note: that was the taxpayer’s undoing in
• In instances where an independent appraisal is required, there
are very strict rules on the qualifications of the appraiser and
on the contents and timing of the appraisal.
Root of the Case: Mohamed v. Commissioner
The taxpayer was a real estate broker, certified real estate
appraiser, and entrepreneur. He and his wife set-up a charitable
remainder Unitrust (CRUT). Over a two-year period in 2003 and
2004, the couple contributed five properties and a shopping
center to the CRUT.
The taxpayer appraised the properties himself and used the
values established in the appraisals to claim deductions on IRS
Form 8283, “Noncash Charitable Contributions.” But he later
admitted in court that he’d never read the form’s instructions
and therefore thought a self-appraisal would suffice.
Besides failing to obtain an independent appraisal, the taxpayer
omitted information required on Form 8283, such as the basis of
the properties he had donated to the CRUT. For four of the five
donated real estate properties, he claimed a combined FMV of
just more than $1 million. He claimed a FMV of $14.8 million for
the fifth property, which he said he undervalued because he
didn’t want to risk an inflated deduction. For the shopping
center, he used a FMV of $2 million. The taxpayer also left the
“Declaration of Appraiser” section on Form 8283 blank.
After the IRS audited the taxpayer and questioned the
self-appraisals, he hired independent appraisers to value the
properties. Their appraisals resulted in FMVs similar to the
ones the taxpayer had claimed. Furthermore, subsequent sales by
the CRUT provided prices close to the values he’d used. But the
IRS continued to object that the values were excessive, so the
taxpayer appealed the case to the Tax Court.
The Tax Court spoke sympathetically about the situation,
pronounced that the taxpayer had probably undervalued the
donations, and even acknowledged that Form 8283 could be
misleading. But the Tax Court still disallowed any
deduction because the taxpayer failed to follow the rules when
he didn’t obtain any written independent appraisals (those he
obtained while being audited were too late) and omitted other
required information from Form 8283.
Avoid growing the same mistakes.
When you donate property to charity, the stakes are simply too
high for any missteps. Stick to the strict letter of the law and
make sure that all the proper information is entered on Form
8283. Remember that an independent, timely
qualified appraisal is needed for a gift—other than cash or
publicly traded securities—valued at more than $5,000.
CRI can provide the necessary assistance to
ensure that you can maximize your deductions for your charitable
gifts of property without running into trouble with the IRS.