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If a 501(c) (3) charitable nonprofit is given real estate with the intention that the organization will put the real estate up for auction is the donor allowed to deduct the fair value of the real estate or only the auction price?

With gifts of real estate held for more than a year that has appreciated in value, a donor may deduct the full fair market value of the property, without regard to whether the charity uses the property in its charitable program.  This rule is different from the rule applicable to gifts of personal property such as art or other collections. Personal property must be used within the charity’s program to obtain an appreciated value deduction, and property sold at auction is not used within the charity’s program.  For personal property(and for real estate held for less than a year), the deduction would be the lesser of tax cost or fair market value.  That is not the rule for real estate.

In this case, the donor could deduct the full fair market value at the time of the gift.  Assuming that the donor will seek to claim a deduction of more than $5000, the donor will have to obtain an independent appraisal of the property and file a Form 8283, including recognition of receipt by the charity and an appraisal summary, with the personal income tax return on which he or she seeks the deduction.  (See Ready Reference Page: “IRS Requires Substantiation of Contributions.”) If the charity sells the property within three years of acquisition, which presumably it will at the auction, it must complete a Form 8282 stating the amount received in the sale and file that with the IRS and give a copy to the donor.  If the auction price is significantly lower than the claimed fair market value, the IRS may want to audit the donor’s tax return.

11/15/2011