IRS Publication 561: Determining The Value Of Donated Property

IRS Publication 561: Determining The Value Of Donated Property. is a document published by the Internal Revenue Service (IRS) that provides taxpayers with information on how to determine the fair market value (FMV) or appraisal value for property donated to a qualified organization. Taxpayers can donate a wide variety of property, including used clothing, art, real estate, securities, patents and business inventory.

Certain donated items, such as pieces of art, may be valued higher than others and allow the taxpayer to claim a much higher deduction than usual. These items may carry extra reporting requirements, such as photographs and a qualified appraisal letter.

Determining the fair market value of an item or piece of property can be difficult because there is no single (or simple) way in which it is set. A good indicator of the fair market value is the price the item or property fetches when sold by the organization the donor gave it to. Another method is to compare the price of the item to the sales price of a similar item.

IRS Publication 561 does not provide donors with information on how to determine the amount of a donation that can be deducted, what records the donor should keep or how to substantiate the appraisal claim. More information on those matters are available in IRS Publication 526, Charitable Contributions.

According to the IRS, fair market value (FMV) is the price that property would sell for on the open market. It is 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 facts.

"Determining the value of donated property would be a simple matter if you could rely only on fixed formulas, rules, or methods. Usually it is not that simple. Using such formulas, etc., seldom results in an acceptable determination of FMV. There is no single formula that always applies when determining the value of property," the agency noted. "This is not to say that a valuation is only guesswork. You must consider all the facts and circumstances connected with the property, such as its desirability, use, and scarcity."

The major valuation methods are: 

Cost or Selling Price of the Donated Property or Item; Replacement Cost; Opinions of Experts; and Sales of Comparable Properties or Items. All these methods have merits and drawbacks and there are many additional considerations for various categories of items covered in the publication.