Donation of Property

What is Donation of Property?

Donation of property refers to the act of voluntarily transferring ownership of real estate to a qualified charitable organization. For real estate investors, this can be a strategic move to achieve philanthropic goals while also realizing significant financial benefits, primarily in the form of tax advantages. It involves a legal transfer of title, making the charity the new owner of the asset.

This process allows donors to support causes they care about, divest from properties they no longer wish to manage, and potentially reduce their taxable income and capital gains liabilities. The property can range from vacant land to residential homes, commercial buildings, or even fractional interests in real estate.

How Property Donation Works

At its core, property donation involves a donor legally transferring the deed of a property to a qualified charitable organization, typically a 501(c)(3) non-profit. Once the charity accepts the property, they assume all responsibilities, including maintenance, taxes, and potential sale. The donor, in turn, becomes eligible for a charitable contribution deduction on their federal income taxes.

The value of the deduction is generally based on the property's fair market value (FMV) at the time of donation, provided certain conditions are met, such as the property being held for more than one year. In some cases, a

bargain sale

might occur, where the property is sold to the charity below its FMV, combining elements of a sale and a donation.

Key Considerations for Donors

• Donor's Motivation: Beyond philanthropy, reasons include avoiding capital gains tax, removing property from a taxable estate, or eliminating property management burdens.
• Property Valuation: For deductions exceeding $5,000, a qualified appraisal by an independent professional is mandatory to substantiate the property's fair market value.
• Charity's Acceptance: Charities evaluate properties based on their mission, marketability, potential liabilities (e.g., environmental issues), and the costs associated with holding or selling the asset.
• Tax Implications: The income tax deduction amount is subject to Adjusted Gross Income (AGI) limits (e.g., 30% for capital gain property), with unused portions often carried forward for up to five years.
• Due Diligence: Donors should conduct thorough due diligence, including title searches and environmental assessments, to ensure the property is free of undisclosed issues that could complicate the donation.

Step-by-Step Process for Donating Real Estate

Donating real estate is a multi-step process that requires careful planning and professional guidance to ensure all legal and tax requirements are met. Follow these steps for a successful property donation:

1. Identify a Qualified Charity: Research and select a 501(c)(3) organization whose mission aligns with your philanthropic goals and that is capable of accepting real estate donations.
2. Assess Property Suitability: Discuss the property with the chosen charity to ensure it meets their acceptance criteria, is free of major liabilities, and is desirable for their use or sale.
3. Obtain a Qualified Appraisal: For deductions over $5,000, commission an independent, qualified appraisal to establish the property's fair market value. This appraisal must adhere to IRS guidelines.
4. Consult Tax and Legal Professionals: Engage an attorney and a tax advisor to structure the donation, understand all tax implications, and ensure compliance with federal and state laws.
5. Prepare and Execute Transfer Documents: Work with your attorney to draft and record the deed transferring ownership of the property to the charitable organization.
6. File Necessary Tax Forms: Report the donation to the IRS using Form 8283, Noncash Charitable Contributions, and other relevant forms when filing your income tax return.

Real-World Example: Charitable Donation of Land

Consider Mr. and Mrs. Johnson, who purchased a vacant parcel of land 25 years ago for $80,000. The land has significantly appreciated, and its current fair market value (FMV) is $600,000. They decide to donate it to a local environmental conservancy, a qualified 501(c)(3) organization, to preserve it.

• Original Basis: $80,000
• Fair Market Value (FMV) at Donation: $600,000
• Potential Capital Gain Avoided: $520,000 ($600,000 - $80,000). If they had sold the land, they would have paid capital gains tax on this amount.
• Income Tax Deduction: As capital gain property, they can deduct up to 30% of their Adjusted Gross Income (AGI). If their AGI is $250,000, they could deduct up to $75,000 in the first year ($250,000 x 0.30).
• Carryforward: The remaining $525,000 of the deduction ($600,000 - $75,000) can be carried forward for up to five additional years, subject to annual AGI limits.

This example highlights how the Johnsons can make a substantial charitable impact, avoid a significant capital gains tax liability, and realize a considerable income tax deduction over several years, all while divesting from an asset they no longer wished to hold.

Advantages and Disadvantages

Advantages

• Significant Income Tax Deductions: Reduce current and future taxable income.
• Avoidance of Capital Gains Tax: Eliminate tax liability on appreciated property that would be incurred upon sale.
• Estate Tax Reduction: Remove the property from your taxable estate, potentially lowering estate taxes.
• Elimination of Property Burdens: No longer responsible for property taxes, maintenance, insurance, or management.
• Philanthropic Fulfillment: Support causes and organizations that align with your values.

Disadvantages

• Irrevocable Transfer: Once donated, ownership is permanently transferred to the charity.
• Complex and Costly Process: Involves legal fees, appraisal costs, and potential environmental assessments.
• Charity Acceptance Risk: Not all properties are accepted, especially those with significant liabilities or low marketability.
• Deduction Limits: Tax benefits are subject to AGI limitations and can be spread over several years, not always immediate.
• Loss of Future Appreciation/Income: You forfeit any potential future appreciation or rental income from the property.