When fine art is donated to museums, everyone wins. Museums acquire new artwork, the donor receives a tax deduction, and the artist benefits from the prestigious institutional destination of the work (also a safe haven from the art markets). The US is privileged to have this system that has helped build the collections of many of the world's best museums.
But, there is always the opportunity for abuse. As such the IRS has a specific set of protocols one must follow to receive tax benefits for artworks valued more than $5,000.
Qualified Appraisal and Qualified Appraiser
The IRS defines a Qualified Appraisal as a document that meets a strict set of standards and is issued by a Qualified Appraiser. The appraisal must meet the relevant qualifications of Regulations section 1.170A-17(A), be issued no more than 60 days before the date of property transfer, and not involve any prohibitive fees.
The Qualified Appraisal must be compliant to the Uniform Standards of Professional Appraisal Practice (USPAP) and the Appraiser must meet requirements including designation from a recognized professional appraisal association relevant to the subject property, such as the Appraiser’s Association of America. There are additional restrictions around who may issue the appraisal, for example if the appraiser was party to the transaction in which the donor acquired the artwork being donated. If the donor acquired a painting from an art dealer, neither the dealer nor any employees of the dealer are qualified to write the appraisal.
A full list of requirements, restrictions and penalties is here.
The Form 8283, which accompanies the appraisal, must be signed and acknowledged by both the Qualified Appraiser who issued the appraisal, and the donee. The donee must also confirm on the 8283 that the artwork qualifies as related use property consistent with the mission of the institution. For example, the artwork is used as an artwork in a public art collection relevant to the donated property. A separate 8283 must be filed for each medium of artwork donated. If a collection of sculptures, paintings and photographs are donated to a museum, the appraisal would require three 8283s.
If the donee sells or otherwise disposes of the property within three years after the date of transfer, the donee must file a Form 8282 notifying the IRS. In this case, if more than $5,000 is profited on the sale, an IRS audit may be triggered and the donor may lose the original tax deduction. The use rule will also come back into play as the IRS will examine what the property was used for, and why it was sold. In order to further prevent abuse, the donor must have owned the donated property for more than one year prior to donation in order to receive a deduction with an appreciated value over the original acquisition cost. If donated within one year, the appraised value is limited to the lesser of Fair Market Value or cost.
The IRS regularly updates the requirements and restrictions of Noncash Charitable Donations. It is crucial to hire a Qualified Appraiser with no bias or interest in the property to ensure a smooth tax filing.