Donating Real Estate to Charity: IRS Deduction Rules

Donating real estate to a qualified charity can be a method for supporting a cause while also yielding a significant tax benefit. The Internal Revenue Service (IRS) has established specific rules that govern these contributions. The process involves precise valuation methods, adherence to deduction limits, and thorough documentation to ensure the donation is recognized correctly and the donor receives the appropriate deduction.

Calculating the Value of Your Donation

The starting point for your tax deduction is the property’s fair market value (FMV). The IRS defines FMV as the price at which a property would change hands between a willing buyer and a seller, with neither being under compulsion to act and both having reasonable knowledge of relevant facts. For most real estate donations, the FMV is established through a formal appraisal.

The property’s classification, which depends on its holding period, affects the deduction. If you have owned the real estate for more than one year, it is considered long-term capital gain property, and you can deduct its full fair market value. For instance, if you donate land purchased for $50,000 that is now appraised at $200,000, your initial deduction amount would be $200,000.

The rules differ for what the IRS terms ordinary income property. This category includes real estate held for one year or less, making it a short-term capital gain asset. It also includes property that, if sold, would generate ordinary income, like real estate held as inventory by a developer. For these donations, the deduction is limited to the lesser of the property’s fair market value or its cost basis. If a developer donates a house with an FMV of $400,000 and a cost basis of $250,000, the deduction would be capped at $250,000.

Understanding Deduction Limits and Carryovers

After calculating the initial value of your donation, the amount you can deduct in a single tax year is limited by a percentage of your adjusted gross income (AGI). The specific percentage depends on the type of property you donate.

For donations of long-term capital gain property to public charities, the deduction is limited to 30% of your AGI. For example, if your AGI is $200,000 and you donate real estate valued at $100,000, your deduction for that year is capped at $60,000.

Donations of ordinary income property are subject to a higher limit of 50% of your AGI. Using the same AGI of $200,000, if you were to donate ordinary income property valued at $120,000, you could deduct up to $100,000 in that year.

If your donation’s value exceeds the AGI limit, the IRS allows you to carry over the unused portion for up to five subsequent years. In the previous example, the donor who deducted $60,000 of their $100,000 donation would have a $40,000 carryover. This amount can be deducted in the following years until it is fully used or the five-year period expires.

If you donate property that has an outstanding mortgage, the transaction is treated as a “bargain sale.” The relief from the debt is considered a benefit to you, while the charitable contribution is the property’s FMV minus the mortgage amount. A bargain sale also occurs when you sell property to a charity for less than its FMV; the transaction is part sale, on which you may recognize a gain, and part contribution.

The Appraisal and Documentation Requirements

The IRS requires a “Qualified Appraisal” to substantiate any noncash contribution valued at more than $5,000. This appraisal must be conducted no earlier than 60 days before the donation date. It must contain a detailed property description, the contribution date, the property’s FMV, and the appraiser’s signature.

The appraisal must be performed by a “Qualified Appraiser.” A qualified appraiser must have earned a designation from a recognized professional organization and have verifiable experience valuing similar properties. They must also be independent of the donor, the charity, and the party from whom the donor acquired the property.

For any contribution of $250 or more, the donor must also obtain a contemporaneous written acknowledgment from the charity. This document must include the charity’s name, the contribution date, and a detailed description of the real estate. The acknowledgment must also state whether the charity provided any goods or services in return and, if so, a good-faith estimate of their value.

This information is compiled on IRS Form 8283, Noncash Charitable Contributions, for gifts over $500. For real estate donations, you will complete Section B, which requires details from the appraisal, the property’s description, its appraised FMV, and information identifying the appraiser. A representative from the charity must also sign the form to acknowledge receipt of the property.

How to Claim the Deduction on Your Tax Return

After gathering the qualified appraisal and written acknowledgment, you can claim the deduction on your federal income tax return. The completed Form 8283, which summarizes the donation, must be attached to your Form 1040.

The deduction is claimed on Schedule A (Itemized Deductions). You will report the charitable contribution amount on the line for gifts to charity, subject to the AGI limits.

If the charity sells or disposes of the donated property within three years of the contribution date, it is required to file Form 8282, Donee Information Return, with the IRS. The charity must also provide you with a copy of this form, which reports the sale price. A significant discrepancy between the sale price and the value claimed on your appraisal could trigger scrutiny from the IRS.