Appreciated Real Estate And Charitable Donations

Donating appreciated real estate to charity is one of those things that can be difficult to generalize about but critical to understand.

Maybe you’re thinking of donating to a charity like Giving Center, but don’t possess the liquid assets to meet your philanthropic goals. Or you are looking for a way to downsize your real estate portfolio without gaining a huge tax bill.

If you are planning to donate appreciated real estate to charity, there are important tax, business and financial considerations involved.

The Benefits of Donating Appreciated Real Estate

Your donations qualify you for an income tax deduction equal to the fair market value (FMV) or the cost basis of the property.

The amount of your deduction usually depends on whether the real estate is a short-term asset (real estate held one year or less) or a long-term asset (real estate held more than one year).

For short-term assets, the tax deduction is equal to the lesser of the property’s FMV or its cost basis. The exception: This limitation applies to all donations to private foundations, even if the assets you wish to donate have been held long-term.

Long-term appreciated assets qualify for a deduction equal to the FMV of the property. The deduction is usually limited to 30% of the donor’s adjusted gross income (AGI).

As an option, you can elect to deduct the cost basis of a long-term appreciated asset instead of the FMV, but your deduction will be limited to 50% of your AGI. This will allow for a larger current-year deduction (50% of AGI rather than the 30%), but if any amount of the deduction is carried over, the cost basis and 50% AGI limit will apply to those carryovers.

Remember, the election applies to all such assets donated during the year. It cannot be applied on an asset by asset basis.

You may carry forward any excess donations for up to five years.

By donating property rather than selling it, you avoid capital gains taxes

Capital gains on all short-term assets are taxed at ordinary income tax rates. Capital gains on all long-term assets are taxed somewhere between 0% and 23.8%, depending on your current income level. For capital gains on the sale of a highly appreciated property, the resulting tax bill can be quite sizable.

Methods to Donate Real Estate

Direct gifts are the simplest method of donating real estate. The deed or title is simply transferred from the donor to the charity.

As the donor, you usually receive a tax deduction equal to the FMV of the property and that deduction can be carried forward for five years. You will also avoid paying the capital gains tax that would otherwise accumulate as a result of the sale of the property.

Charitable Remainder Trust (CRUT)

A CRUT is a great way for donors with a highly appreciated real estate to accomplish their philanthropic goals while, at the same time, preserving income for future generations. This type of trust is tax-exempt, which means it is not taxed when the property sells, all of the proceeds from the sale can be fully reinvested.

Distributions from the CRUT to its beneficiaries are determined annually based on a fixed percentage (at least 5%) of the value of the CRUT’s assets. At the end of the CRUT’s run, all remaining assets are distributed to designated charitable organizations.

The contribution of real estate to a CRUT gives the donor an immediate charitable deduction (equal to the current value of the remainder interest that will ultimately pass to charity) and also bestows future cash flows to the beneficiaries.

There are a couple important factors to consider when contributing real estate to a CRUT, it is important to seek legal and financial advice before using this method for donating property.

Bargain Sale

A bargain sale is when the donor sells the property to a charity for less than the property’s FMV.

As the donor, you are taxed on your gains, which is the selling price less a pro-rata share of the cost or basis of the property. In this instance, your basis in the property is allocated between the sale and gift portions of the transaction.

You are able to claim a tax deduction equal to the difference between the property’s FMV and its selling price.

Things to be Aware of When Donating Real Estate

Donations of appreciated property are subject to greater scrutiny from the IRS, it is important to consult with a tax advisor before donating real estate. Here are several situations to consider:

Charitable Substantiation Requirements

In order to prevent over-valuation, real estate donations over $5,000 will require a qualified appraisal of the property, performed by a qualified appraiser. If the value of the real estate is $500,000 or more, the appraisal has to be attached to your tax filing.

Your deduction may be disallowed if you do not possess the appropriate documentation.

Prearranged Sale

If you, as the donor, enter into a binding contract/agreement to sell a property, you may not subsequently donate that property (before the completion of the contract) in order to avoid capital gain taxes.

Keep in mind, since the contract exists, you are deemed to have sold the property. When the charity sells this property, you are still responsible for paying capital gain taxes as if you had sold the property yourself.

Depreciation

If you’ve claimed accelerated depreciation on the property you are donating, your tax deduction will be reduced in the amount of depreciation you’ve taken that exceeds the depreciation allowed under the straight-line method.

This concept is like the ordinary income recapture that occurs on gains from the sale of property where accelerated depreciation was claimed.

Bargain Sale

It is important that you identify the donation elements of the sale when you are entering into a bargain sale transaction with a charity.

If the donation element isn’t clearly stated at the time of the sale, you may lose the tax deduction. You won't have an opportunity to identify the donation element at a later date.

Mortgaged Property

Donating real estate to a charity that is subject to a mortgage may cause recognition of income to you, as the donor. Bargain sale rules will apply, as the property is treated as if it were sold for a balance outstanding on the mortgage.

The fact that you are still liable for making mortgage payments after the donation doesn’t preclude the recognition of taxable income.

Giving Center is a great vehicle for your real estate donation needs. Please visit our real estate donation section here for more information on how you can donate real estate with Giving Center.