A prospective donor wants to donate a family farm to us for placement in a donor advised fund at our small community foundation. The donor realizes that an appraisal of the property would normally be required to support the fair market value of the charitable gift. However, the donor has identified an interested buyer who is willing to pay $1.5 million for it. He knows not to sign any sale documents until after the gift takes place. Does he still need an appraisal if the property is sold shortly after the gift is made or does the sale price determine the value of the gift for tax purposes?
First, your donor is smart not to sign an agreement of sale before the gift is completed. If he does so and has a capital gain on the value of the property, he will have to pay the capital gain tax out of his pocket after having given you the asset.
But with a gift of property worth more than $5000, your donor will need to have an independent appraisal and, when he claims a deduction of more than $500,000, must attach a copy of the actual appraisal report to the Form 8283 filed with his tax return claiming the deduction. (See Ready Reference Page: “IRS Requires Substantiation of Contributions”) It won’t be sufficient to say that it sold a short time after the gift for $1.5 million. The sale price will be relevant for the appraisal but not necessarily dispositive.
Although it is obviously more work, both of you may want the independent appraisal as well. The property may actually be worth more than $1.5 million so that a sale at a higher price would give your donor a larger deduction and provide more for your donor advised fund.