by Valerie Grunduski and Laurice Szydlowski Plante Moran
Philanthropic taxpayers donate to charitable causes for a variety of reasons, from helping out their local communities, to supporting research into curing certain diseases, to providing aid to groups of people facing difficult challenges. It’s important, then, to keep in mind that the tax code supports philanthropy by allowing an income-tax deduction for charitable contributions.
If you’re considering a donation to charity, you need to understand that what you donate, how you donate, and to whom you donate can affect the amount you’re able to deduct on your tax return. From the charity’s standpoint, the form of the donation may not make a big difference. However, if you have appreciated property, you are generally better off donating the property instead of cash. Common types of appreciated property include real estate, works of art, collectibles, intellectual property, vehicles and securities.
Make sure your charity is recognized by the IRS
In order for your contribution to be deductible, it must be made to a U.S. organization that meets certain requirements set forth by the IRS. The easiest way to verify that your organization qualifies is to use the service’s online tool, Exempt Organizations Select Check. Once you’re in the tool, you’ll need to pick one of the three search parameter buttons in order to bring up the form where you enter the actual data.
Not all donations are created equal
Donating appreciated real estate often delivers a more valuable benefit for both the taxpayer and the recipient charitable organization.
Taxpayer benefits include:
- If you sell the property yourself, you’d likely incur a large, long-term capital gain taxed at a federal tax rate of 20 percent, a 3.8 percent federal net investment income tax, and suffer a state income tax hit as well. When you follow the proper procedures to donate the property, these taxes won’t apply.
- Most states will allow you an exemption for their state real estate transfer tax if you transfer the property to a charitable organization.
- If the property has a high carrying cost that you no longer want to incur, or if developing the property to its highest and best use isn’t cost-effective, a donation can allow you to eliminate these carrying costs without incurring the taxes listed above.
Charitable organization benefits include:
- The organization may be able to dispose of the real estate for a lower cost, thereby obtaining additional cash for its tax-exempt purpose.
- The organization may be able to develop the property for use consistent with its tax-exempt mission, such as its own office space, affordable housing, or parks and recreational centers.
Additional requirements to deduct a gift of appreciated real estate
The most significant tax advantages for a donation of appreciated real estate can only be achieved when the deduction available is based on the fair market value of the donated property. In most cases, the donation may be valued at fair market when the following conditions are met:
- The donor must hold the property contributed for more than 12 months.
- For charitable deductions of appreciated real property in excess of $5,000, the IRS requires the donor to file an additional tax form and to attach a signed, qualified appraisal of the property.
- A qualified appraisal must:
- Include special required language that’s very specific for property that’s being contributed to a charity.
- Must be dated no more than 60 days prior to the contribution and must be received by the time the income tax return reporting the charitable contribution is filed.
- Include a signature from the appraiser on the form that is filed with your tax return.
If you’re considering a charitable contribution of real estate with a fair market value significantly higher than your cost, or if your real estate is burdened with high carrying costs or barriers to development, a donation of the property could provide a significant tax-savings opportunity. It’s important that you understand the tax benefits that are available if you make a charitable contribution of real property, as well as the additional requirements that must be met to qualify for this type of increased charitable contribution deduction.
Valerie Grunduski and Laurice Szydlowski are senior tax managers with Plante Moran, one of the nation’s largest certified public accounting and business advisory firms with locations in Illinois, Michigan and Ohio, as well as internationally. For more than 90 years, real estate clients have relied on the firm to address their most complex challenges and opportunities. To learn more about how Plante Moran professionals can help you, visit plantemoran.com.