You Need to Know the Fair Market Value When You Donate a Car to Charity

Although the laws were changed back in 2005 to counteract instances of tax avoidance, it is still possible to claim the "fair market value" of any car, boat, trailer, RV or truck that you donate to a non-profit organization (NPO). However, you do need to make sure that you are determing that "fair market value" according to current legislation.

It is understandable that you should consider that a value quoted by the Kelley Blue Book could be used as a "fair market value" - indeed, many tax professionals also considered this to be the case. Howevfer, the IRS has different ideas of the definition to be used.

Many vehicles donated to charities are in a condition that could be fairly described as lower than "poor". Some third party, for profit, agencies were advertising for, and accepting, cars regardless of whether they ran or not. The lucky owner saved on the scrapyard fee, got the car picked up free and then claimed the "fair market value" as a tax deduction. It is estimated that this practice cost the IRS $640 million in 2000.

These practices led to some agents skimming up to 70% off the top of the sale price in "service fees". The difference in the true value soon became apparent when the vehicle was sold, and since most of them ended up on the wholesale market, the difference became even more noticeable.

When using the Blue Book, even a "poor" rating requires the car to be a runner. It is obvious that there was a major difference between what these cars would sell for if an ad was put in the paper, and what was being claimed as a "fair market value".

This led to the laws being changed in 2005. There is now a receipt required for any gift of a value exceeding $250, as well as a written declaration of the amount that the car actually sold for (over $500) or the use that it was put to. This means that if the car is sold as its first use after being donated, you are only permitted to claim the actual amount that the charity realised on the sale of the vehicle.

On the other hand if, instead of being sold, the vehicle is used as is, you may deduct the real market value, determined as the amount you would have got had you actually sold the vehicle instead of donating it. This means that if your car is given to a needy person for their own use, your deduction value could increase many times over.

Further to this, if the car is sold by the charity during the first two years of ownership, the charity will need to send you a Form 8282 letting you know what happened to your donated vehicle. You don't need to change anything on your taxes however.

It is always a good idea to take a range of photographs of the vehicle, both inside and out, to back up any claim that you make. If your vehicle is valued at more than $5000 you will need to get an independent appraisal in writing to back up your claim.

Bear in mind that many people price older vehicles to sell quickly, so take this into consideration what fixing your "fair market value".