Tax Benefits of Donating Real Estate
Most people know the tax benefits of making charitable donations in the form of cash, stocks and non-cash (goodwill). But donating real estate is something you might not have considered as part of your charitable giving plan.
This article describes three different ways to donate real estate, and the tax benefits and nuances associated with each.
Three Ways to Donate Real Estate
There are several ways to donate real estate. Regardless of how you choose to donate, the transaction must be handled carefully in order to maximize your tax benefit.
1. Direct Gift
A direct gift is when you transfer real property to a charitable organization.
The donor gets a tax deduction equal to the fair market value (FMV) of the property and avoids reporting capital gains on the appreciated gains.
Items to Consider
- You will need a real estate appraisal to determine fair market value (FMV).
- If accelerated depreciation was taken on the property, you need to reduce the donated amount by the accelerated depreciation over straight-line depreciation.
- If the property is subject to a mortgage, then complications can arise if the charitable organization assumes the mortgage. The amount of mortgage assumed will be considered the purchase price from the charity to the donor. This will trigger a bargain sale. The easiest way to avoid this issue is to pay off the mortgage before making the donation.
- To get the biggest tax benefit, the donation should be made to a public charity. Donating to a private foundation is limited to the lower of FMV or your cost basis.
- Donating to a donor-advised fund can be very helpful as they may have more resources and expertise in getting the real estate to a charitable organization.
- Avoid donating property that has been negotiated to be sold to the point (before donating the property) that the IRS considers it a prearranged sale. In this instance, the IRS may consider your donation as an assignment of income, in which case you would need to pick up capital gains based on what the charity sold the property for.
- You will need to file IRS Form 8283 and have it signed by the appraiser.
2. Bargain Sale
A bargain sale is a sale to the charitable organization for less than FMV of the property. If there is a mortgage, the amount of the mortgage will serve as the sales price in the bargain sale.
Although the charitable deduction and avoidance of capital gains from a bargain sale will not be as lucrative as that derived from a direct sale, you will still get the same partial benefits as demonstrated below.
Items to Consider
- You will need a real estate appraisal to determine FMV.
- The donated amount will be the excess of the FMV of the property over the purchase price.
- The cost basis calculation is calculated by first dividing the purchase price by the FMV, then multiplying that by your adjusted cost basis. For example:
Purchase price (or assumed mortgage) = $30,000
FMV = $120,000
Cost basis = $50,000
The cost basis percentage allocated to the sale is 25%, which equates to $12,500 of the cost basis 25% ($30,000 / $120,000) or $12,500 ($50,000 x 25%).
The gain on the sale is $17,500 ($30,000 - $12,500) and the charitable deduction is $90,000 ($120,000 - $30,000).
A capital gain of $52,500 ($70,000 - $17,500) was avoided.
3. Conservation Easement
A conservation easement is an agreement that limits uses of the property to protect its conservation value. The agreement is made between a land trust or government agency. A conservation easement allows the owner to retain usage of the land, albeit with some restrictions, but protects the land from unwanted usage. The property can be sold or inherited, but the new owners need to adhere to the agreement.
There are multiple tax benefits associated with donating a conservation easement.
- You can deduct the value of the conservation easement based on a valuation up to 50% of AGI.
- Any excess can be carried forward up to 15 years.
- If you are a qualified farmer or rancher as defined under Section 170 of the Internal Revenue Code, then you can deduct up to 100% of AGI.
- Most states have tax incentives such as state credits, deductions and property tax credits.
- There may also be an estate tax benefit in which the land is valued lower plus you can exclude 40% of the land value up to $500,000 for certain land that is subject to donated easement.
Items to Consider
The value of the easement is usually calculated by assessing the value of the property before the easement, less the value of the property after the easement.
You’ll see tax benefits from donating real estate as part of your charitable giving plan. However, it’s critical that you be aware of all the tax rules so you maximize the deduction and avoid any negative consequences.
Contact us here or call 800.899.4623 for help.
Published on January 05, 2022