Tax Deductions for Art Donations: What You Need to Know

When it comes to maximizing your tax deductions, understanding the requirements for donating personal property like artwork is crucial. The IRS mandates specific appraisals to qualify for these deductions. Here’s what you need to consider:

1) When Do You Need a Tax Appraisal for Donating Personal Property?

To be eligible for a tax deduction, you must donate your non-cash item to a "qualified organization," such as a 501(c)(3) public tax-exempt entity. The donation must align with the organization's mission. For instance, donating a piece of French art to a French art museum qualifies, but donating it to a fire station does not—unless it's a painting of a fire station.

Generally, the IRS requires an appraisal report for objects with a Fair Market Value exceeding $20,000.

2) How Does the Appraiser Determine the Value for the Deduction?

Appraisals for tax purposes typically use the "Fair Market Value" method. This is the price at which the item would sell between a willing buyer and seller, both having knowledge of relevant facts, in an open market, around the donation's acceptance date. A "qualified appraiser" must conduct the appraisal. The IRS defines a qualified appraiser as someone with a professional designation from an accreditation society (e.g., ASA, AAA) or one who regularly performs paid appraisals and meets specific education and experience requirements.

The appraiser will research appropriate marketplaces where such items are traded and analyze comparable sales. If the relevant marketplace is an auction, the price includes the buyer’s premium.

3) Can the IRS Determine a Different Value for the Deduction?

Yes, the IRS can reassess the value. If the recipient sells the donated property within three years, the Fair Market Value may change, and the donor might owe additional taxes. A qualified appraiser can help negotiate with the recipient organization to avoid selling the collection within this period, mitigating this risk.

The IRS has an Art Advisory Panel, consisting of appraisers, dealers, and curators, that reviews appraisals. If your appraisal is significantly over- or under-valued, you could face fines.

4) Is the IRS Likely to Examine the Appraisal?

The likelihood of an IRS review depends on the donation and your audit risk factors. Donations exceeding $20,000 are often reviewed, and those over $50,000 almost always are. For gifts under $5,000, the review chance is minimal.

While donating fine art can be complex, it can also be a beneficial way to preserve your legacy and save on taxes. With the assistance of a qualified appraiser, the process becomes straightforward.

We hope these guidelines for tax appraisals on fine art and personal property donations are useful.

Carpe Diem!

Lynn Magnusson, ASA, AAA

Co-Authors: Lynn Magnusson, ASA, AAA, and Becky Lipnick, Communications Coordinator