Donating real estate to charity can come with a myriad of benefits. Not only will you help out a worthy cause, but also take advantage of tax benefits that can lower your overall personal tax burden. The largest benefit is, arguably, the opportunity to avoid the capital gains tax by holding the property for longer than a year and donating it to a qualified charity. If you need help navigating charitable giving, consider working with a financial advisor who can help you craft an efficient plan to donate real estate to charity.
Benefits of Donating Real Estate to Charity
When you donate money to charity, you have an opportunity to lower your tax burden. The same concept holds true when you donate real estate to charity, but the tax benefits are not the only ones that are going to help you financially. Here are the benefits you can tap into by donating your real estate property:
Avoid capital gains tax: If you donate an appreciated property that you’ve held for longer than one year, you can qualify for a federal income tax charitable tax deduction. This special deduction eliminates your capital gains tax obligations on the property.
Claim a tax deduction equal to the fair market value: You can claim a fair market value charitable deduction during the tax year when the gift was made. That could significantly reduce your income tax obligations for the year.
Stop maintaining the property: Once the property moves into the charity’s hands, it’s no longer your concern. With that, you can stop worrying about maintenance costs, property taxes or insurance.
Pass off the responsibility of selling the property: Selling a property can be a challenge. Instead of dealing with this hassle yourself, the recipient will be responsible for selling it or maintaining it.
Ultimately, avoiding a major capital gains tax and taking a tax deduction can significantly benefit your tax situation. Plus, you’ll have the property off of your books, which can be a big relief. And, of course, the charity will benefit from this move, too. When they receive the property directly, that could help them avoid up to 20% in capital gains tax.
What to Consider Before You Give
Before you donate real estate to charity, there are some specific considerations that come into play.
Appreciation: If you’ve held the property for more than a year and seen considerable appreciation, you may be able to take an income tax deduction for the full fair-market value. It can be up to 30% of your adjusted gross income.
Debts: If the property has debts attached, then the IRS may consider that a “bargain sale” that involves some capital gains tax.
You are ready to be hands-off: When you transfer the property to a charity, they’ll have full control. The charity will handle the sale transaction, including setting the price.
Don’t prearrange a sale: If there’s a pre-existing sale agreement in place with some documentation, that could spell trouble with the IRS. Specifically, the IRS may consider a prearranged sale as an “anticipatory assignment of income.” With that designation, you might be required to pay capital gains tax.
Income taxes: If you take the fair market value deduction, there are some limitations. For donations to donor-advised funds, overall deductions cannot equal more than 50% of your adjusted gross income.
Bunching: Many taxpayers won’t qualify for the necessary deductions to surpass the standard deduction threshold established by tax reform in 2017, according to Fidelity Investments. However, you can still receive a tax benefit by “bunching” multiple years’ worth of charitable giving in one year to surpass the itemization threshold. In off-years, you take the standard deduction.
It’s a good idea to consult with a financial advisor on the most tax-efficient way to donate real estate to charity. Although there are some general rules, the specifics of your individual situation will impact the best options.
Charitable Giving Cautions
Before committing a piece of real estate to charity, take some time to carefully research your options. Although many charities do wonderful work, there are some scams out there. A few of the worst offenders include Kids Wish Network, Youth Development Fund and Optimal Medical Foundation.
Each of these charities gave less than 11% of the donated funds to directly aid the victims they purport to help. The unfortunate reality is that scams are out there. So, explore the worst charities in America before committing a valuable piece of real estate to a cause.
If you have a piece of property that you’d like to donate to charity, there are many worthy causes to support. Not only will the charity benefit from your generosity, but you can also take advantage of tax strategies that will lower your tax burden as a result of this generous gift. Before moving forward, consider working out the details of this complex transaction with a financial advisor. They’ll know an efficient solution for your charitable pursuits.
Tips for Charitable Giving
A financial advisor can help you create a charitable giving plan that works for your situation. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
Giving to charity can benefit the recipient and lower your tax burden. Consider taking advantage of charity tax deduction options.
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