By: Rudman Winchell Attorney Daniel Burke
Donating real estate to a charitable organization can benefit both the charity and the donor. The tax laws provide several methods for donation of real estate, both during a donor’s life or through bequests under a donor’s will, or other gifts taking effect at death.
The simplest method is the outright transfer of property during the donor’s life, by a deed conveying the donor’s entire interest in a property to a qualifying charitable organization. Another method, known as a bargain sale, is the sale of property to the charity for less than fair market value.
There are several benefits to outright lifetime gifts. The charity receives the property immediately, either to sell or to use in furtherance of its mission, and the donor has the satisfaction of seeing the contribution benefit the charity during the donor’s lifetime. Donors who want to continue using the property may consider donation of a remainder interest in a farm or personal residence, with the donor retaining the use of the property for the donor’s life, or the donation of a qualified conservation easement. Donors who want to continue receiving income from the property may consider donating the property through a qualified trust.
If the charitable donation complies with the strict requirements of the Internal Revenue Code, the donor can receive an income tax deduction. The amount of the deduction depends on the circumstances, including the type of organization and the type of property. When a sale of the property would have generated a long term capital gain, the deduction is usually the full fair market value of the property. This deduction will reduce the donor’s income tax liability. The amount deductible in any one year may be limited to a percentage of the donor’s adjusted gross income, but the deduction can usually be carried over for five years. The charitable deduction must be substantiated by a qualified written appraisal completed by a qualified appraiser.
Lifetime gifts of real estate can also have estate planning advantages. An outright gift of real estate removes the property from the donor’s estate. This eliminates the need to administer that property during probate of the donor’s estate, and also reduces the amount that may be subject to state or federal estate taxes.
Finally, it is important to keep in mind that the charitable organization must agree to accept the real estate. The organization must do due diligence to determine whether it can use the property in its own operations, or whether it will be able to sell the property. The organization may ask the donor to pay for title examination, environmental evaluation, and other investigations.
This is only a brief summary of the benefits of charitable donations of real estate. There are many factors and options to consider before you proceed with any donation. If you are considering donating real estate, you should consult a real estate or estate planning attorney, and a tax professional for help navigating the legal and tax requirements.
These materials have been prepared by Rudman Winchell for educational purposes only. They should not be considered legal advice. The transmission of this information to you is not intended to create a lawyer-client relationship. Readers should not act upon this information without seeking professional counsel. You should not send any confidential or private information to Rudman Winchell until a formal attorney-client relationship has been established, in writing.