How to Determine Fair Market Value of Donated Items

Items you donate to a charity's flea market can be tax deductible, but assigning a value to them can be tricky.

According to the Internal Revenue Service, fair market value is "the price that a property would sell for on the open market. It's the price that would be agreed on between a willing buyer and a willing seller, with neither being required to act, and both having reasonable knowledge of the relevant fact." Unfortunately, there is no single formula to determine fair market value. All relevant facts -- such as the desirability, use and scarcity of the property donated -- must be considered.

Instructions

1. Know that due to their worn condition and dated style, household goods such as furniture, appliances and linens usually have little or no market value. Fair market value can be assessed by judging these items against comparable items at used or second-hand stores, which is usually far below the price paid for these items when they were new. A qualified appraisal is required on deductions greater than $500.

2. Don't claim a fixed formula or method to judge fair market value for used clothing and other personal items; there is no such formula. However, comparable items in used clothing stores can be used to judge their value.

3. Get an appraisal for jewelry and gems because of their unique and specialized nature. The jewelry appraisal should describe the style, cut and setting of the gem, and whether it's still fashionable.

4. Know the rules pertaining to appraisals. Unless it is less than $5,000, any deduction for paintings, antiques and other objects of art must be supported by a qualified appraiser's written appraisal; for art valued greater than $20,000, a copy of the signed appraisal must accompany the tax return; for art valued between $20,000 and $50,000, you must also include a photograph of the property; for art valued at more than $50,000, a Statement of Value must be requested from the IRS.

5. Consult publications when relevant. Deductions for cars, boats and aircraft must be comparable to a price listed in publications that sell similar items. According to the IRS, "The FMV of a donated vehicle is the same as the price listed in a used vehicle pricing guide for a private party sale only if the guide lists a sales price for a vehicle that is the same make, model, and year, sold in the same area, in the same condition, with the same or similar options or accessories, and with the same or similar warranties as the donated vehicle."

6. For stocks and bonds, pay attention to dates. The fair market value for a stock or a bond is the selling price of that share or bond on the donation date. For stocks and bonds that are bought and sold on a stock exchange, the fair market value is an average of the highest and lowest price quote of the day.

7. Get a professional appraiser for real estate. Because valuations on real estate can be unique and complicated, a professional appraiser must complete a detailed appraisal of the property. This takes into account comparable sales, capitalization of income and replacement costs should the property need repair work.

8. Know the fair market rules as they pertain to businesses. The fair market value of a business, whether it be a sole proprietorship or a partnership, is, according to the IRS, "the price that would be agreed on between a willing buyer and a willing seller." The assets of the business, its demonstrated earnings capacity and several others factors also are considered.

9. Compare when it comes to policies. The fair market value for life insurance and annuity contracts is the price a comparable policy would sell from that same company that had issued the donated policy.

Tips & Warnings

• Before any deductions are claimed, a taxpayer should always consult a tax professional.

• Taxpayers should be aware that penalties for improper fair market value deductions can be harsh, starting at 20 percent of the underpayment of tax because of the overstatement, and rising to 40 percent for particularly egregious cases.

References

• IRS.gov: Publication 561
• "Kiplinger" Magazine; Assessing Donated Items' Value; Kimberly Lankford; Dec. 7, 2006
• Salvation Army

Resources

• National Association of Tax Professionals