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Charitable Deductions for Appreciated Real Estate Property

Gifting real estate to a charitable organization could be good for you as well as the charity. It may allow you to qualify for a tax deduction and avoid realizing a capital gain on the property. The tax treatment for gifts of real property depends on many factors such as the type of asset, number of years you have owned the property, and nature of the organization receiving the donation. It is important to consult with a tax professional before donating to ensure that you are fully aware of the tax benefits and potential consequences.

As a general rule, a contribution is equal to the asset’s fair market value (FMV) at the time of the donation. However, appreciated property is subject to certain limitations.  Appreciated property is property which has increased in value since you purchased the asset. For instance, if you bought property 20 years ago for $50,000 that is now worth $250,000, it appreciated in value by $200,000. If you were to sell the property, you would realize a gain of $200,000 which is subject to tax. However, if you decided to give the land to a charity, the value of the contribution would be equal to its FMV or $250,000. Since you are making a donation instead of selling the property, you would generally avoid a gain.

The deductible amount of donated appreciated property may be less than its FMV if the property is considered ordinary income property or capital gain property. Ordinary income property is property that if sold at FMV would have generated ordinary income, while capital gain property is property that would have resulted in a long-term capital gain if sold at FMV. The deductible donation of appreciated ordinary income property is limited to the assets adjusted basis, while appreciated capital gain property is deductible up to its FMV.

The length of time that you have owned the asset has a lot to do with how it is treated. Property held for less than one year is considered a short-term capital asset. The deduction is limited to your cost basis in the asset and is limited to 50% of your AGI. Property held for more than a year is considered a long-term capital asset. The deduction may be taken at the asset’s FMV which would be limited to 30% of AGI. It is not always clear how to treat ordinary income. For instance, there was a developer who built condominiums years ago.  A few of the condominiums that were unsold went into a rental pool and were subject to depreciation, while others remained available for sale. Eventually, the  developer decided to donate a rental condominium to a public charity. At the time of the donation the FMV of the condominium was $550,000, while the adjusted basis in the property was $300,000. Since the condominium was part of the rental pool, it was not considered an ordinary income producing property. As a result, a deduction for the FMV could be taken, less any previously deducted depreciation that was subject to recapture as ordinary income.

The deduction for donated appreciated capital gain property is usually its FMV. However, there are a few exceptions that reduce the deduction of the FMV by the amount of long-term capital gain that would have been recognized had the property been sold. One such exception can be elected by the taxpayer.  You may elect to take a deduction on a cost basis instead of the FMV of an appreciated property. This could be helpful if you are making a large donation. You can apply the gift limit of 50% of adjusted gross income (AGI), as opposed to the limit of 30% of AGI.

The type of charity that you make the donation to also affects how it is treated for tax purposes. If you donate property to a public charity (those that receive funding from many sources −such as the general public, corporations, government agencies, or other charities), your deduction may be limited to 30% of AGI. The deduction is reduced to 20% of AGI if you donate to a private foundation (those limited to one source of funding such as a family or corporation). Furthermore, if you donate long-term capital gain property to a private non-operating foundation, then the charitable deduction is limited to the adjusted basis of the asset.

Paperwork completed by both the donor and done must be completed to claim a charitable deduction for appreciated property. Form 8283 Non Cash Charitable contributions must be filled out by the donor for any items earning a deduction of greater than $500. Items with deductions exceeding $5,000 are required to attach an appraisal to the form and must have the appraiser sign the form. In addition, part of the form is filled out by the donee to acknowledge receipt of the donation and confirmation that they’ll notify the IRS if they sell the property within three years of accepting the donation.

Please contact a member of the LaPorte Real Estate industry group to discuss the tax implications of donating appreciated property and/or our Valuation team for information on appraising assets valued at more than $5,000.