Valuation and Tax

Valuation and tax issues regarding your art can be complex.  As with creating a will, we urge you to seek the assistance of a lawyer. You may click here to find legal resources that might suit your situation.

A “qualified appraisal” is a specific kind of valuation of your work that is completed according to guidelines set by the IRS. It differs from the general “value” of your work. Depending on the circumstances, you may not need to obtain a qualified appraisal. This page will explore when a qualified appraisal is necessary or desirable, how to obtain one, who can conduct qualified appraisals, and other general rules.

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Why should I have my work appraised?

There is a lot of value in having your work appraised for estate planning purposes. Just as we recommend creating an inventory when planning your estate, having accurate appraisals of your work can be a useful managing tool for your estate.

You may desire to have your artwork appraised for a number of reasons:

  • You are preparing an inventory and want to include the value of your artwork.
  • You may want to give away some of your art, and want to document its value as part of that process.
  • Or you may be planning your estate, including drafting a will or Trust, and want to know the value of your property for estate planning purposes.

If you are preparing an inventory, accurate appraisal and valuation information of your work is likely to be some of the most practical and helpful information you can include.

Certain rules govern the appraisal and donation process of your own artwork to a tax-exempt organization during your lifetime. If you donate your art to a tax-exempt organization and seek a tax deduction, depending on the cost of production of your donated art (or “basis”), you may need to have obtained a qualified appraisal of that work to get a deduction. (More information on the rules below, under “What are the rules for appraising my art for charitable contributions and receiving tax deductions?“).

Many of the same rules that govern the appraisal, donation, and tax deduction process during your lifetime apply to charitable deductions taken by your estate, but there are some important differences. We try to provide a brief outline of the process and explain some of the related legal issues in the following sections.

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How do I decide if I should get my work appraised?

Although there are benefits to getting a qualified appraisal, it can depend on the situation. It is not always necessary to obtain a qualified appraisal in order to receive a tax deduction for a charitable donation of your work. Additionally, a qualified appraisal does cost money. Thus, it might not always be the best option for you.

When seeking a tax deduction for a charitable donation of your work(s), a qualified appraisal is only necessary when the combined cost of the materials used in the work(s) you have donated is equal to or greater than $5000.

There are also timing regulations to consider. A qualified appraisal of your work(s) must be made no sooner than 60 days before your donation

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Who appraises my artwork?

A qualified appraiser has the following characteristics:

  1. He regularly performs appraisals for which he is paid. A qualified appraiser is someone who asserts himself or herself as an expert in a particular type of property.
  2. He is completely independent of the donor. In other words, the qualified appraiser cannot be the donor, a relative of the donor, the donee, or any party to the contribution in which the donor acquired the property.
  3. He has either earned an appraisal designation from a recognized professional appraiser organization, OR has met minimum education and experience requirements. The IRS considers the completion of college or professional-level coursework relevant to your art sufficient for meeting the education requirement. Two years of professional experience buying, selling or valuing your type of art satisfies the experience requirement.
  4. A qualified appraiser understands that he or she makes fraudulent statements as to the value of the work, that he or she may be subject to civil penalties.

The IRS does not recognize any particular appraiser or organization of appraisers. However, there are different organizations that maintain membership lists of qualified appraisers that you can rely on to find someone to appraise your work, such as the Appraisers Association of America.

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What are the rules for appraising my art for charitable contributions and receiving tax deductions?

You may have substantial incentives to contribute art you have created to a tax-exempt organization while you are still living. These might include causes near and dear to you, wanting to help your friends with their causes, as well as building buzz for your career and a foundation for your legacy. Sadly, however, the IRS tax deductions you may hope for as the artist are not among those incentives.

Artists who donate their own work to a tax-exempt organization are only allowed to deduct the cost of the materials they used to create it. This is because the IRS categorizes works of art created by the donor as “ordinary income” property rather than capital gain property. Generally, your “basis” in property is what you paid for it (plus any improvements, although that is generally not relevant for artwork), and your deduction for your charitable contribution of ordinary income property while you are alive is no more than your basis in the property. This means that you are only able to deduct the cost of the materials you used to make your art for purposes of income tax charitable deductions. In contrast, upon your death, your estate can deduct the fair market value of any of your artwork that is donated to a not for profit, tax deductible, charitable organization.

You have no obligation to declare your charitable contributions of your art to the IRS. You may believe that the hassle of documenting your art supply purchases for gifts to a tax-exempt organization is more trouble than it is worth if the cost of your materials is low. If you want to claim costs of your art supplies as charitable contribution deductions, you will have to itemize those deductions rather than taking the standard deduction, but it is up to you whether to do so. Non-itemizers donate billions to tax-exempt organizations every year without choosing to request tax benefits.

If you want to preserve your option to deduct the cost of the art supplies you used to create art that you intend to contribute to a charitable organization, you must get and keep a receipt from the recipient organization when you contribute the art. This receipt from the organization should contain the organization’s name, the date and location of your contribution, and a reasonably detailed description of the property. You should also keep a written record of the cost of materials and how you arrived at it, but you won’t have to get a qualified appraisal if the cost of materials you are deducting is less than $5,000.

IRS regulations explicitly require all charitable contributions to be properly substantiated. Very specific rules apply to the substantiation of contributions of art that requires appraisal. These rules apply when the donor claims a deduction of more than $5,000 for the property contributed. This $5,000 threshold for a tax deduction of your charitable contribution of art in a given calendar year applies whether you donated a single piece of your artwork, or whether you donate multiple pieces for which the combined deduction surpasses the threshold. In other words, if your cost of materials for your total charitable contributions of your art surpass the $5,000 threshold in a single calendar year, then an appraisal is required, and you must strictly follow three substantiation rules:

  1. You must arrange a qualified appraisal of the contribution.
  2. You must attach a completed appraisal summary to your tax return.
  3. You must maintain a record of the contribution.

NOTE:

  • You may not claim charitable contribution deductions for the cost of appraisals of your charitable contributions of your art. However, these fees may qualify as a miscellaneous deduction, subject to the 2% limit.
  • The forms you submit to the IRS vary depending on the combined cost of materials that you wish to deduct for a charitable contribution. There are different cost thresholds that trigger certain requirements, so take careful note is required in your situation.

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What is included in a “qualified appraisal”?

A qualified appraiser does a qualified appraisal of a contribution of artwork within the 60 days immediately before the date you donate the work. The qualified appraiser must sign and date the appraisal and must not base the appraisal fee on a percentage of the appraised value of the contribution. The appraisal should contain these components:

  1. A detailed description of the property;
  2. The physical condition of tangible property;
  3. The date or expected date of the contribution;
  4. The terms of any current or anticipated agreement or understanding that relates to the use, sale, or other disposition of the property the donor is contributing;
  5. The name, address, and taxpayer identification number of the appraiser;
  6. A detailed description of the appraiser’s qualifications;
  7. A statement that the appraisal was prepared for income tax purposes;
  8. The date of the appraisal;
  9. The appraised fair market value of the property on the date of the contribution;
  10. The method of valuation used to determine the fair market value; and
  11. The specific basis for the valuation, such as any comparable sales transactions.

Note: This section, “Valuation and Tax”, was prepared in significant part based on materials provided by the City University of New York (CUNY) Elder Law Clinic, Main Street Legal Services, Inc., CUNY School of Law, 2014.

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