Sour Grapes: No Charitable Deduction for Donated Farmland

If you donate appreciated property like farmland to charity, you may be able to write off the fair market value (FMV) of the property on your tax return for the year of the donation. However, as shown by a new case from the Tenth Circuit Court of Appeals, Presley, CA-10, No. 18-9008, 10/25/19, you must obtain a qualified charitable appraisal before the date return due date.

Jan 6th 2020
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If you donate appreciated property like farmland to charity, you may be able to write off the fair market value (FMV) of the property on your tax return for the year of the donation. However, as shown by a new case from the Tenth Circuit Court of Appeals, Presley, CA-10, No. 18-9008, 10/25/19, you must obtain a qualified charitable appraisal before the date return due date.

Generally, you can deduct the FMV of property you’ve owned longer than a year, as long as you meet the strict substantiation requirements in the tax law. For example, if you bought a painting for $2,500 that is currently worth $10,000 and you donate it to a museum, you can deduct the full $10,000. There’s no tax due on the $7,500 appreciation in value…ever.

Under current regulations, however, a donor making a noncash charitable contribution exceeding $5,000 must (1) obtain a qualified appraisal for the property, (2) attach a completed appraisal summary on Form 8283 (Noncash Charitable Contributions) to the tax return and (3) maintain other records relating to the donation. For these purposes, the appraisal must be prepared by a qualified appraiser no later than the tax return due date, plus any extensions, for the year of the donation. This appraisal should include certain information, such as a description of the property, the appraiser's qualifications, the appraisal dates, the valuation method used and the specific basis for the valuation.

If these requirements aren’t met, no deduction is allowed. But a deduction won't be denied if you can show that the failure to obtain a qualified appraisal was due to reasonable cause and isn’t due to willful neglect.

In the new case, a couple in Oklahoma formed a nonprofit organization. Its main purpose was to promote Christianity and provide optometry services to people in low-income areas of other countries through annual mission trips. The husband, who is an optometrist and operates several vision care businesses, served as the organization’s lead pastor and spiritual leader.

Soon after the organization was formed, the optometrist developed a for-profit blueberry farm with the purpose of donating all of the profits from the sale of fruit to the nonprofit organization. In 2008, he entered into a leasing agreement whereby land was donated to the organization. In addition, the farm donated a Toro tractor-mower and the cost of land improvement expenses.

However, when the couple claimed a deduction totaling $236,000 for the real estate donation, the IRS stepped in. Subsequently, it was determined that the Form 8283 they filed was incomplete and omitted certain critical information. Most important: The couple didn’t receive or obtain the appraisal by the due date of their tax return, as required by the regulations. As a result, the Tenth Circuit Court denied the deduction.

Moral of the story: Alert your clients to the substantiation rules in this area. They can’t benefit from the generous tax breaks for charitable donations of property if they don’t comply with the regulations. Make sure they obtain a qualified appraisal before the return is filed.

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