Both new and established nonprofit organizations may not know how to value tangible property donations if they don’t receive them very often. Here’s a quick overview to help you review the rules.

Defining FMV

Most tangible property donated to a charitable organization is valued based on fair market value (FMV) — generally, the price that the property would sell for on the open market. If a donor contributes used clothes for a charity to distribute to refugees, the FMV would be the price that typical buyers pay for clothes of the same age, condition, style and use.

If the donated property is subject to any type of restriction on use, the FMV must reflect it. So, if a donor stipulates that a painting must be displayed, not sold, that restriction affects its value.

What to consider

There are three particularly relevant FMV factors:

1. Cost or selling price. This is the amount the donor paid for the item or the selling price received by your organization on disposal. Because market conditions can change, that cost or sales price becomes less important the further in time the purchase or sale is from the contribution date.
2. Comparable sales. This is the sales price of property similar to the donated property. The IRS may give more or less weight to a comparable sale depending on the:

• Similarity between the property sold and the donated property,
• Time of the sale,
• Circumstances of the sale, and
• General market conditions.

3. Replacement cost. FMV should consider the cost of buying or creating property similar to the donated item. However, the replacement cost must have a reasonable relationship with the FMV.

Receiving real estate

Restrictions on the use of real estate can dramatically affect the value of such gifts. For example, land that isn’t eligible for commercial development often is considered less valuable than land that is. If your organization rents a space free of charge, or at below FMV, you must record an in-kind contribution. This is estimated at the fair rent, or the difference between the fair rent and the below-market rent that you’re paying.

In a multi-year lease, the lease’s FMV can’t exceed the property’s FMV. For example, if your total lease payments equal $3 million, where the property’s FMV is $2.5 million, the contribution recorded in the first year would be limited to $2.5 million.

Critical value

Properly valuing tangible property donations is critical for preparing accurate financial statements. In addition, you’ll be reporting these valued property donations to the IRS in various parts of your annual information return. Note that with certain large donations of tangible property, the donor is required to meet additional IRS requirements regarding value to claim a tax deduction. Contact us if you need help valuing large donations.

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