The Accountant's Guide to Real Estate Donations
Learn how your clients can use real estate donations to provide significant tax savings while satisfying their charitable goals.
How donors can benefit from donating real estate
Avoid or Reduce Taxes
When selling a property they can save on taxes by donating some or all of it.
When selling a property they can save on taxes by donating some or all of it.
Avoid Capital Gains Tax
By donating property to charity, clients can avoid paying significant capital gain tax.
By donating property to charity, clients can avoid paying significant capital gain tax.
Save Time and Headache
If inherited a property and are unable to maintain and/or lack time to sell
If inherited a property and are unable to maintain and/or lack time to sell
Release Responsibility
When burdened by additional property ownership, donating can release the burden.
When burdened by additional property ownership, donating can release the burden.
Add Charitable Giving
When a client doesn't have a spouse or heirs and haven't included charitable giving in their estate plan.
When a client doesn't have a spouse or heirs and haven't included charitable giving in their estate plan.
In order for your clients to receive a current year tax deduction, they'll need to allow enough time for the charity to complete the donation before year end.
Ways of Donating Real Estate
Outright Gift
Outright Gift
The simplest and most common method of donating real estate. The deed or title is transferred from the donor to the charity. A donor will then receive a tax deduction equal to the fair market value of the property and that deduction may be carried forward for up to five years.
Bargain Sales
When the donor sells the property for less than its fair market value to a charity. The difference between the fair market value and the sale price is then considered a donation.1 This allows the donor to recoup funds and receive a tax deduction for the donated portion, a win-win scenario for the donor and the charity.
Planned Giving
Charitable Remainder Trust (CRT)
An irrevocable trust that contains property assets where a portion of the trust’s value is distributed each year to one or more beneficiaries for a term of years or for life. At the end of the term, the remaining CRT assets are distributed to the charity.
An irrevocable trust that contains property assets where a portion of the trust’s value is distributed each year to one or more beneficiaries for a term of years or for life. At the end of the term, the remaining CRT assets are distributed to the charity.
BENEFITS
Tax deduction for the donor, equal to the present value of charity’s remainder interest in the CRT22
The CRT’s exemption from income tax on the capital gain tax on the sale of the property.3
Charitable Gift Annuity
When a donor makes a contribution and in return receives fixed annual payments for life from the charity. A CGA also allows the donor to claim a partial income tax deduction for the year of the contribution. The value of the annuity is determined under the tables issued under IRC Section 7520.
When a donor makes a contribution and in return receives fixed annual payments for life from the charity. A CGA also allows the donor to claim a partial income tax deduction for the year of the contribution. The value of the annuity is determined under the tables issued under IRC Section 7520.
Retained Life Estate
When a donor transfers the ownership of their house or farm to a charity but retains the right to use the property for their lifetime. This allows the donor to receive a current tax deduction in an amount that is based upon their and their spouse’s age and the value of the property.4
When a donor transfers the ownership of their house or farm to a charity but retains the right to use the property for their lifetime. This allows the donor to receive a current tax deduction in an amount that is based upon their and their spouse’s age and the value of the property.4
Almost any type of real estate can be donated
Some charities may have further restrictions on which properties they will accept as well as value thresholds that must be met.- land
- residential homes
- vacation homes
- commercial buildings
- industrial properties
- apartment buildings
- mobiles homes
- condos
Tax Deduction for an Outright Property Donation
A real estate donation qualifies for an income tax deduction for the fair market value (FMV) or the cost basis of the property.
Your client’s deduction will depend on whether the real estate they donate is a short-term asset (held less than 1 year) or a long-term asset (held more than 1 year)
Short-term assets
Qualify for a deduction equivalent to the lesser of the property’s fair market value or its cost basis.
Long-term assets
Qualify for a deduction for the fair market value of the property, generally limited to 30% of the donor’s AGI.5
A donor can elect to base the tax deduction for their long term asset on the cost basis rather than the FMV of the property.
This will raise their AGI limitation to 50 percent and can allow for a larger current-year deduction but if any of the deduction is carried over, the cost basis and 50 percent AGI limit will apply to those carryovers.
This will raise their AGI limitation to 50 percent and can allow for a larger current-year deduction but if any of the deduction is carried over, the cost basis and 50 percent AGI limit will apply to those carryovers.
Donors may carry forward a real estate deduction for up to five years.6
| Form of Donation | Amount Deductible | Maximum Deduction as % of AGI |
|---|---|---|
| Outright Gift of Appreciated Property | ||
| Long-term asset | 1. 100% of fair market value or 2. by election, cost basis | 1. 30%, 2. 50% |
| Short-term asset | Cost basis | 50%/30% rule |
| Bargain Sale of Appreciated Property | ||
| Long-term asset | 100% of difference of FMV and sales price, appreciation partly taxed | 30% |
| Short-term asset | None, if sold at basis |
By donating property, instead of selling, you completely avoid paying capital gains taxes
Depreciated real estate are typically subject to §1250 rules, which apply to buildings and structural components. When depreciated in a straight-line basis (as are all real properties put in use after 1986) they do not have “depreciation recapture” and the donation can be deducted for the full FMV.Donation Checklist
Determine Eligibility
For a real estate donation to be eligible for a tax deduction, it must be made solely for charitable or public purposes by an individual who will itemize deduction on Schedule A of form 1040 and is not taking the standard deduction. It must also be made to an organization that has a 501(c)(3) designation from the IRS.
TIPS
- In order for this to be worth the extra effort and documentation, the total of the itemized deductions for that year would need to be more than the standard deduction one is entitled to in their specific circumstance.
- To verify if the charity is eligible, look up in IRS pub 78, or call IRS Customer Account Services 877-829-5500. There are other charity databases, such as GuideStar.com, which list more information on the charity.
Determine the property’s value
The value of real estate in term of tax deduction is measured by the fair market value of the property at the time of donation.
For property worth $5,000 or less, one may use the fair market value, as determined by comparable sales. For property worth more than $5,000, it must be appraised by a qualified appraiser.
Form 8283 must be filed with one’s federal tax return and the appraiser must sign the form.7 If the charity disposes of the property within three years, the IRS requires it to report the sale price on Form 8282.
For property worth $5,000 or less, one may use the fair market value, as determined by comparable sales. For property worth more than $5,000, it must be appraised by a qualified appraiser.
Form 8283 must be filed with one’s federal tax return and the appraiser must sign the form.7 If the charity disposes of the property within three years, the IRS requires it to report the sale price on Form 8282.
Fair Market value is defined as “the price at which the property would change hands between a willing buyer and a willing seller, neither having to buy or sell, and both having reasonable knowledge of all the necessary facts.” The rules relating to how to determine fair market value are addressed in IRS Publication 561, “Determining the Value of Donated Property.”
Documentation
For real estate worth $5000 or less:
- A receipt from the charity
- Section A of the Form 8283 must be completed by the client and attached to their tax return
For real estate worth more than $5000
- A receipt from charity
- Section B of the Form 8283 must be signed by an authorized official of the charity
- Written appraisal of the property’s value. This appraisal must be from a qualified appraiser and must be completed no more than 60 days before the donation and no later than the date of filing taxes.8
More Resources
Helpful phone numbers
- Kars 4 Kids Real Estate Division, (855) 227-7454
- Ordering forms, instructions, and publications, (800) TAX-FORM
- Tax questions, (800) 829-1040
- IRS Customer Account Services, (877) 829-5500
IRS forms
- Form 1040, U.S. Individual Income Tax Return
- Form 1040, Schedule A, Itemized Deductions
- Form 4868, Application for Automatic Extension of Time to File Taxes
- Form 1040 – X, Amended U.S. Individual Income Tax Return
- Form 8282, Donee Information Return
- Form 8283, Noncash Charitable Contributions and Disclosure Requirements
- Form 8453, U.S. Individual Income Tax Transmittal for an IRS e-file Return
Other links
- https://www.kars4kids.org/realestate
- https://www.guidestar.org/
- https://apps.irs.gov/app/eos/, Tax Exempt Organization Search
- Publication 78, Cumulative List of Charitable Organization
- Publication 526, Charitable Contributions
- Publication 557, Tax-Exempt Status for Your Organization
- Publication 561, Determining the Value of Donated Property
- Publication 1771, Charitable Contributions – Substantiation
1 IRC Section 1011(b)
2 IRC Section 170
3 IRC Section 2055(e)(2); IRC Section 664
4 IRC Section 25.2512-5(d)
5 IRC Section 170(b)(1)(B)
6 IRC Section 170(d)(1)
7 Regulations Section 1.170A-13(c)
8 Regulations Section 1.170A-13(c)