Tax Benefits of Donating Real Estate to Charity

Donating real estate to charity can be a meaningful way to support an organization while potentially creating valuable tax benefits. If the property has appreciated significantly, a direct donation may allow you to avoid capital gains taxes on that growth while also qualifying for a charitable deduction. Depending on the size of your estate, the gift could also reduce the value of assets subject to future estate taxes.

If you need help navigating charitable giving, consider working with a financial advisor who can help you craft an efficient plan to donate real estate to charity.

Benefits of Donating Real Estate to Charity

When you donate money to charity, you have an opportunity to lower your tax burden. The same concept holds true when you donate real estate to charity, but the tax benefits are not the only ones that are going to help you financially. Here are the benefits you can tap into by donating your real estate property:

Avoid capital gains tax: If you donate an appreciated property that you’ve held for longer than one year, you can qualify for a federal income tax charitable tax deduction. This special deduction eliminates your capital gains tax obligations on the property.
Claim a tax deduction equal to the fair market value: You can claim a fair market value charitable deduction during the tax year when the gift was made. That could significantly reduce your income tax obligations for the year.
Stop maintaining the property: Once the property moves into the charity’s hands, it’s no longer your concern. With that, you can stop worrying about maintenance costs, property taxes or insurance.
Pass off the responsibility of selling the property: Selling a property can be a challenge. Instead of dealing with this hassle yourself, the recipient will be responsible for selling it or maintaining it.

Ultimately, avoiding a major capital gains tax and taking a tax deduction can significantly benefit your tax situation. Plus, you’ll have the property off of your books, which can be a big relief. And, of course, the charity will benefit from this move, too. When they receive the property directly, that could help them avoid up to 20% in capital gains tax.

What to Consider Before You Give

Before you donate real estate to charity, there are some specific considerations that come into play.

Appreciation: If you’ve held the property for more than a year and seen considerable appreciation, you may be able to take an income tax deduction for the full fair-market value. It can be up to 30% of your adjusted gross income.
Debts: If the property has debts attached, then the IRS may consider that a “bargain sale” that involves some capital gains tax.
You are ready to be hands-off: When you transfer the property to a charity, they’ll have full control. The charity will handle the sale transaction, including setting the price.
Don’t prearrange a sale: If there’s a pre-existing sale agreement in place with some documentation, that could spell trouble with the IRS. Specifically, the IRS may consider a prearranged sale as an “anticipatory assignment of income.” With that designation, you might be required to pay capital gains tax.
Income taxes: If you take the fair market value deduction, there are some limitations. For donations to donor-advised funds, overall deductions cannot equal more than 50% of your adjusted gross income.
Bunching: Many taxpayers won’t qualify for the necessary deductions to surpass the standard deduction threshold established by tax reform in 2017, according to Fidelity Investments. However, you can still receive a tax benefit by “bunching” multiple years’ worth of charitable giving in one year to surpass the itemization threshold. In off-years, you take the standard deduction.

It’s a good idea to consult with a financial advisor on the most tax-efficient way to donate real estate to charity. Although there are some general rules, the specifics of your individual situation will impact the best options.

Charitable Giving Cautions

Before donating real estate, confirm that the recipient is a qualified charitable organization and that the contribution will be eligible for a deduction. Donations of property generally must be claimed as itemized deductions, and certain income-based limits can affect how much of the contribution is deductible in a given year.

Real estate donations can also require more documentation than cash gifts. When the claimed deduction for donated property exceeds $5,000, taxpayers generally need a qualified appraisal and must complete the applicable section of Form 8283. An inaccurate valuation can create problems with the deduction, so donors should carefully document the property’s fair market value.

Debt attached to the property can further complicate the transaction. If a charity assumes a mortgage or other liability, part of the transfer may be treated as a sale, potentially reducing the charitable deduction and creating taxable gain for the donor.

The structure of the gift can also affect the tax outcome. Bargain sales, partial-interest donations and conservation easements can all be subject to additional rules that differ from a straightforward transfer of an unencumbered property. Since donating real estate can involve valuation requirements, deduction limits and possible capital gains consequences, it can be helpful to consult a tax professional, estate planning attorney or financial advisor before completing the transfer.

How to Donate Real Estate to Charity

Donating real estate to charity typically starts with choosing a qualified charitable organization that is willing to accept the property. Not every nonprofit has the resources to manage, maintain or sell real estate, so it is important to confirm that the organization accepts property donations before beginning the transfer process.

The next step is usually determining the property’s fair market value. For larger non-cash charitable contributions, the IRS generally requires a qualified appraisal, and the donor may also need to complete Form 8283 when filing a federal tax return. Keeping records of the appraisal, acquisition cost and transfer documents can help support the deduction.

The charity will then review the property before accepting it. This process may include examining the title, checking for mortgages or liens, reviewing environmental concerns and estimating the costs associated with owning or selling the property. If debt is attached to the property, the donation can create additional tax consequences for the donor.

Once the charity agrees to accept the gift, ownership is transferred through a deed or other appropriate legal document. The donor generally gives up control of the property at that point, and the charity can decide whether to keep it, use it for its mission or sell it.

Because the tax treatment can vary based on the property’s value, holding period, debt and how the charity uses it, donors may want to coordinate with a tax professional, attorney or financial advisor before completing the gift.

Bottom Line

If you have a piece of property that you’d like to donate to charity, there are many worthy causes to support. Not only will the charity benefit from your generosity, but you can also take advantage of tax strategies that will lower your tax burden as a result of this generous gift. Before moving forward, consider working out the details of this complex transaction with a financial advisor. They’ll know an efficient solution for your charitable pursuits.

Tips for Charitable Giving

A financial advisor can help you create a charitable giving plan that works for your situation. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
Giving to charity can benefit the recipient and lower your tax burden. Consider taking advantage of charity tax deduction options.