Bought Low, Donated High? Why Your Purchase Price Can Make or Break a Noncash Charitable Deduction

Suppose you buy a piece of land, a painting, or shares in a private company, and a year or two later an appraiser tells you it is worth ten times what you paid. If you donate it, can you deduct the appraised value? Sometimes. But when the gap between your purchase price and the claimed value is large, the IRS and the Tax Court will want a convincing explanation of what changed in between. Without one, the deduction can shrink to a fraction of the claim and a 40% penalty can follow.

This post explains why your own purchase price is often the most important number in a noncash charitable deduction, what can legitimately justify a higher value, and how to plan a gift so the paperwork supports you rather than undercutting you.

The Rule: Fair Market Value on the Date of the Gift

For most donated property held more than a year, the deduction is the property's fair market value when you give it. The regulations define that value as the price a willing buyer and a willing seller would agree on, with neither forced to act and both reasonably informed about the relevant facts (Treas. Reg. § 1.170A-1(c)(2)).

Appraisers can estimate that price several ways: comparable sales, projected income, or replacement cost. But there is usually one piece of evidence that beats all of them, an actual arm's-length sale of the same property close to the gift date. Courts have long given heavy weight to a price that was freely negotiated close to the date being valued. If you are the buyer in that sale, the number is already in your closing file.

Two 2026 Cases That Show the Problem

Two Tax Court decisions this year, both involving conservation easements, make the point vividly.

• Rising Rock Partners, LLC v. Commissioner, T.C. Memo. 2026-45. Rural Georgia land listed on the open market sold for about $941,000, roughly $3,750 per acre. About 13 months later, a partnership owning the land claimed a $12.765 million deduction for an easement, based on an appraisal that assumed a granite quarry and valued the land above $52,000 per acre. The appraiser mentioned the recent purchase but never reconciled it with his conclusion. The court treated that sale as the best indicator of what the land was worth, found the easement worth $649,955, and applied the 40% gross valuation misstatement penalty.
• North Donald LA Property, LLC v. Commissioner, T.C. Memo. 2026-19. Louisiana farmland was bought for $2,975 per acre. Less than two years later, the partnership claimed a $115.4 million deduction, implying the land had appreciated more than 14,000%. The theory was a clay mine on land zoned only for agriculture. Using comparable sales, backed by the price actually paid, the court valued the easement at $175,824 and imposed the 40% penalty.

Notice what the court did not say. It did not hold that land can never be worth more than its purchase price. It held that the claimed value needed support, and the support was missing.

Bridging the Gap: What Can Justify a Higher Value

Think of the distance between your purchase price and the claimed value as a gap that needs a bridge. A credible appraisal builds that bridge out of objective changes the market would recognize. Examples include:

• Approvals actually obtained. A rezoning, subdivision approval, or permit granted after you bought can raise value, because a buyer would pay for it. A hope of approval is far weaker.
• Real physical or legal improvements. Clearing a title defect, securing legal access, adding utilities, or combining adjacent parcels into a more useful tract.
• Market movement shown by sales. Comparable properties selling for more in the interval, documented with actual transactions.
• Facts the earlier deal could not have reflected. New, verifiable information that a reasonably informed buyer and seller would not have had at the time.

Things that usually do not bridge the gap:

• The tax benefit itself. Investors paying more for a partnership interest because of the expected deduction does not prove the land is worth more.
• A use the law does not allow. Mining, dense development, or commercial use that would require a rezoning nobody pursued.
• "The seller did not know what they had." The standard assumes reasonably informed parties. Arguing that the seller underpriced the property rarely persuades.
• Income projections for a business that does not exist. Discounted cash flow models for hypothetical mines or developments carry little weight when sales data is available.

Your Own Forms Tell the IRS About the Gap

You cannot keep the purchase price out of view. Form 8283, required for noncash gifts over $500, asks for the date you acquired the property and your cost or adjusted basis. In North Donald, the partnership's Form 8283 reported a basis of about $804,000 next to an appraised easement value of $115.4 million. That kind of contrast invites an exam.

Other substantiation rules to know:

• Qualified appraisal. Gifts of property claimed at more than $5,000 (other than publicly traded securities and a few other exceptions) generally require a qualified appraisal by a qualified appraiser.
• Timing. The appraisal generally must be dated no earlier than 60 days before the gift and received before the due date, including extensions, of the return claiming the deduction.
• Attachment. For property claimed at more than $500,000, the appraisal itself must be attached to the return.
• Easement and syndication reporting. Certain syndicated easement deals are listed transactions requiring extra disclosure, and partnership easement deductions are generally capped at 2.5 times the partners' relevant basis under § 170(h)(7).

Do Not Overlook the One-Year Rule

Holding period matters as much as value. Under § 170(e)(1)(A), the deduction is reduced by any gain that would not have been long-term capital gain if you had sold the property. In plain terms, if you have owned the property for a year or less, or it is inventory or other ordinary income property, your deduction is generally limited to your basis. Buying something and donating it eleven months later at a higher appraised value usually produces a deduction equal to what you paid, no more.

Penalties Are Steep, and Good Faith May Not Help

If the value claimed is 150% or more of the correct value, a 20% penalty can apply to the resulting underpayment. At 200% or more, it becomes a 40% gross valuation misstatement penalty. For charitable deduction property, the usual reasonable cause defense is not available for a gross valuation misstatement, so relying on an appraiser does not rescue the claim. In Rising Rock, the claimed value exceeded the correct value by more than 1,900%.

Fitting It Into 2026 Planning

Beginning in 2026, itemized charitable deductions are reduced by a floor equal to 0.5% of adjusted gross income, and taxpayers in the top bracket see the tax benefit of itemized deductions capped at 35%. Those changes make it more important that the deduction you claim is one you can keep. A smaller, well-supported deduction is worth more than a large one that collapses in an audit, adds penalties, and keeps interest running for years.

Practical Tips

• Give your appraiser the closing file. Ask for an explicit reconciliation between your purchase price and the concluded value.
• Document changes as they happen. Keep copies of approvals, surveys, title work, and contractor invoices after you buy.
• Ask for comparable sales. Be cautious about any valuation that relies mainly on projected income for a use the property does not have.
• Watch the holding period. Confirm you have owned the property for more than a year before the gift.
• Be skeptical of deduction multiples. An offer of several dollars of deduction for each dollar invested is a red flag, not a feature.

Key Takeaways

• A recent arm's-length purchase of the donated property is often the strongest evidence of its value.
• A claimed value far above your purchase price needs a documented bridge: approvals obtained, real improvements, market movement, or new verifiable facts.
• Form 8283 reports your basis and acquisition date, so the IRS will see any large gap.
• Property held a year or less is generally limited to a basis deduction under § 170(e)(1)(A).
• Gross valuation misstatements on charitable property carry a 40% penalty with no reasonable cause defense.

If you are planning a gift of land, art, or business interests, schedule a consultation with SMB CPA Group before you sign anything. You can also contact us, see the industries we serve, or review our pricing.

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