To stay newsworthy and gain some goodwill, celebrities often donate their possessions to raise money for charity.

Oprah Winfrey grossed $600,000 at a yard sale in Santa Barbara. Star Trek captain and astronaut William Shatner auctioned off a kidney stone for $25,000. Madonna donated costumes, fine art and pictures from her first wedding and raised over $7.5 mil. (Reportedly, she also offered to remarry Sean Penn if he bid $150K on their photos.)

The World Giving Index ranked the U.S. as the most generous country in 2019. Those who want to support their college, church and favorite causes donate all types of assets, including personal property, like art and collectibles, stocks and bonds, retirement funds, real estate, part of a business and even intangible items like patents.

The donated asset must be valued to claim a tax deduction, and this can be tricky.

Values can differ

If you have ever traded collectibles like baseball cards or watched Antiques Roadshow, you know that the values of some assets can vary widely, even if the items seem similar. But what makes celebrity assets more valuable usually has little to do with the items. Instead, it is the price a buyer is willing to pay to own something associated with a favorite celebrity (called “intrinsic value”) and the potential resale price the buyer expects to receive for the item down the road (called “investment value”).

Like my grandma’s V-Day hat, a family heirloom might have a high intrinsic value to the owner but not a high investment value to someone else.

An asset can be valued differently based on its purpose and user (or seller, in the case of celebrities). For example, I appraised the stock of a contracting company and determined three different prices based on the company’s various potential buyers. (One buyer was a competitor looking to purchase the business for “synergistic” or “strategic” value.)

To standardize how assets are valued, the IRS developed rules for appraisers to follow specifically for taxes. Understanding how these rules apply can increase your charitable deduction and protect your returns from an examination.

What is “fair market value”?

The term you hear most often to describe the value the IRS uses to determine the amount of a gift is “fair market value.” We use this term loosely, but it has a specific definition, especially when deducting a charitable contribution and when filing gift and estate taxes.

The IRS defines fair market value as “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.”

The willing buyer and seller are “hypothetical” and do not need to be real people, which makes it possible to value an asset that has not actually sold. Instead, an appraiser will look at the cost of comparable properties, like real estate properties recently sold, as one determinant of value.

Fair market vs. other values

Fair market value is different than “book value,” which is how much you paid for an asset. If you bought a piece of land for $200,000, that is the book value. It doesn’t matter how long ago you bought it or if the land (or other asset) is worth much more or less now. The book value remains the same.

The land has probably gone up in value (appreciated), so you would not want to sell or donate it at book value. However, the clothes or household items you donate to a thrift store will probably sell for much less than the book value (unless you are a celebrity). In either case, the IRS dictates you use fair market value.

Appraisals

If you are donating something you believe is valuable, you probably do not want to use the “thrift store value” since it will be too low. It would be better to have the asset appraised for a higher value. The IRS requires a qualified appraisal for an asset donated that is worth more than $5,000.

Be careful whom you hire to perform your appraisal, especially if the asset is a business interest or high-value item. The weight the IRS gives to experts’ opinions of value is determined by their knowledge and experience and the facts to support their valuation. Obtaining a high-quality appraisal will reduce the chance of a tax examination.

To find a qualified real estate appraiser, go to your state licensing board. In California, go to brea.ca.gov. The American Society of Appraisers credentials appraisers of personal and business property, gems and business interests. Find them at appraisers.org. The American Institute of Certified Public Accountants at aicpa.org certifies CPAs to value businesses with the Accreditation in Business Valuation.

Reasonableness

Valuations are complicated and often costly due to the time and research materials involved. I have discussed many valuation issues with several IRS supervisors both casually at conferences and when representing others at tax examinations. The IRS representatives repeatedly stated that the most crucial consideration for deciding not to challenge a charitable deduction was that the valuation was reasonable.

If you donate an item, and the charity will be selling it, you will probably want to inquire how they plan to sell it. We have all seen the commercials to donate, instead of sell, your old automobile. Make sure the charity will attempt to obtain the highest price available for the asset.

The reason celebrities auction their items is to receive the highest price and the biggest tax deduction. Another reason is that the price obtained for an asset at a well-publicized auction, like Madonna’s, supports the amount of charitable deduction as proof of its fair market value. (Remember, fair market value is the price the property would sell for on the open market.)

See your tax adviser

There are other decisions you will need to make as well. For instance, is it better to sell the asset and donate the proceeds or donate the asset to the charity and let them handle the sale?

Should you donate the item directly or do it as a planned gift and receive something in return, like a Charitable Gift Annuity?

Consult with your CPA or tax professional whenever you plan to make a significant gift to a charity or an individual. You can also talk to your favorite charity. Most have fundraising staff, and some have “gift planning” specialists who would be happy to help.

When it comes to the IRS, value is definitely not in the eye of the beholder. (Even if Scarlett Johansson’s used tissue recently sold for $5,300.) It is fair market value, and the appraisal should be reasonable and well supported.

Michelle C. Herting, CPA, ABV, AEP, specializes in gift and estate tax planning, trust administrations, and business valuations. She has three offices in Southern California.