Donating real estate to charity is difficult to generalize, but absolutely critical to understand.
If you have always wanted to donate to charity, but never really had the liquid assets to meet your philanthropic goals, or you’re looking for a way to downsize your real estate portfolio without having to deal with a huge tax bill; real estate donations might just be what you’re looking for.
Let’s dive right in.
Real estate is the largest asset class in the world. A real estate donation is the act of donating property you own to charitable organizations. It allows you to enjoy a substantial tax deduction all at the cost of helping others.
In most cases, property owners will donate real estate that has grown in value or that has unfortunately turned into an unneeded property in their portfolio. Often, it’s the best course of action.
Real estate donations provide value for individuals and corporate donors alike.
The equity from donated real estate helps charitable organizations thrive in their missions and will support many worthy causes that are in need of urgent assistance.
When you donate real estate, it provides a world of benefits for both the donor, and for the lives of the people who will be drastically assisted.
What Type of Real Estate Donations Are Accepted?
When it comes to donating real estate to charity, and nonprofits organizations accepting those donations, effective fundraising has been proven to help them succeed in their mission.
However, just like a Trojan horse, not every piece of real estate should be accepted.
Some real estate may come with environmental liabilities. This could financially or legally impact the charity if they were to accept it.
Thorough briefing and care should be taken at all times to ensure that real estate donations do not cause reputational or financial risk to the nonprofit.
With that being said, however, most charities do accept virtually any type of real estate. There are no particular set of rules in place.
For this reason, in most cases, charities will accept the below forms of real estate as a donation:
Vacant land donations
What Type of Real Estate Donations Are Not Accepted?
In order to make sure that you’re eligible to participate in real estate donations, you should confirm accurate details of your property with the charity of your choice before setting anything in stone.
For now though, to give you a general idea of what to expect, here are some of the most common reasons real estate unqualifies for donation:
Large open mortgage: Real estate with an open mortgage can have negative impacts on a charitable organization. An unpaid mortgage can subsequently allow the real estate to lose so much of its value that it becomes worth even less than what’s owed on it. Additionally, there will be costs of title transfers and holding costs that are ongoing. This means that when the charity comes to sell this property, their profit margin will not be worth all of the work initially put in. In some cases, however, if donors offer to pay off a portion of a large outstanding mortgage, the charity may accept it.
Environmental: You won’t find this a lot in residential properties, but environmental contamination from nearby gas stations, mechanics, or car dealerships can put charities off accepting your real estate donation. This proves to be a big risk for a charity if they accept to take on this property as it would be their responsibility if any issues are discovered.
Extremely low value: Believe it or not, some undeveloped land in rural areas or homes in depressed markets can only value up to a few thousand dollars. This may seem like an impressive value when it comes to a charitable donation, but when put in the form of real estate, and you factor in the cost of title transfer, ongoing maintenance, and taxes, the charity can actually lose money instead of gain it.
Buildability: Real estate donations that are classed as ‘un-buildable’ can value a lot less. In some cases, a charity won’t accept this donation. This refers to lots or pieces of land located on the side of a hill or a mountain, environmentally protected land, or a location where zoning restrictions are in place.
The Benefits of Donated Real Estate
First and foremost, you’ll be helping so many people in need with your generous donation
Second, you’ll be helping yourself! Donating real estate to charity can allow the owner to receive charitable tax deductions based on the fair market value of their property. Bear in mind, however, the value will be determined by an independent appraisal.
Additionally, the donor will avoid paying the capital gains taxes on the property when donating to charity.
The tax benefits are long-lasting, meaning it will cover you for up to five years!
You’ll receive complete freedom from the tax you were previously paying on the property
You’re no longer obliged to pay maintenance along with any other fees the property incurred
Freedom from liability and insurance
You will receive peace of mind knowing that your property is no longer a drain or burden
Real Estate Donation IRS Tax Deduction
As you’re already aware, real estate donations can help you qualify for a huge tax deduction that can last up to five years.
However, In order for you to be eligible to receive a tax deduction, you must ensure that it will be made solely for charitable or public purposes by an individual who will itemize the deduction on Schedule A of Form 1040.
It’s important to avoid taking the standard deduction. Another vital aspect is to guarantee that the charitable organization you’re donating your real estate to has a 501(c)(3) designation form from the IRS.
The Value of Donated Real Estate
The value you’ll receive from your real estate donation will be measured by the fair market value of the property at the time you choose to make the donation.
If your real estate sums up to $5,000 or less, you may use the fair market value that is determined by comparable sales. On the other hand, if your property is worth more than $5,000, you have to get it appraised by a qualified appraiser.
You must fill out Form 8283 with your federal tax return, and your chosen appraiser must sign the form.
This is necessary as if the charity does manage to dispose of the property within three years, then the IRS will require it in order to be able to report the sale price on Form 8282.
Fair Market Value Fair Market value is defined as “the price at which the property would change hands between a willing buyer and a willing seller, neither having to buy or sell, and both having reasonable knowledge of all the necessary facts.” The rules relating to how to determine fair market value are addressed in IRS Publication 561, “Determining the Value of Donated Property.”
The Required Documentation
For real estate worth $5000 or less:
A receipt from the charity
Section A of Form 8283 must be completed by the client and attached to their tax return
For real estate worth more than $5000:
A receipt from the charity
Section B of Form 8283 must be signed by an authorized official of the charity
Written appraisal of the property’s value. This appraisal must be from a qualified appraiser and must be completed no more than 60 days before the donation and no later than the date of filing taxes.
Know Your Charity
When donating real estate to a charitable organization, it’s essential that you make sure it goes to a cause you care about, or at the very least, a cause that will truly benefit somebody in need.
At the end of the day, your donations are supposed to help organizations that positively impact the world; they’re supposed to give you a feel-good factor, but you won’t feel so good after you find out you have been scammed by a fake charity.
Or even worse? A charity that ‘claims’ to do good but their CEOs take a large portion of the money home.
With well over one million IRS-registered charities scattered out throughout the United States, donating real estate to charity can be a confusing and seriously frustrating process.
How are you able to know if a charity is doing a good job? Could their fundraising tactics be a scam?
How can you be sure that the IRS approves your chosen charity? How do you even know if they’re doing the best job?
The short answer? Research.
At the end of the day, informed giving is effective giving. Fortunately for all of us, we’re in a tech timeline.
Everything we could possibly imagine to be online, is online. Including an increasing number of third-party organizations that can help sort through the turmoil of the nonprofit world.
Whilst some of these vetting and rating organizations specialize in particular types of charities such as international or poverty, others stick to charitable organizations of specific sizes; while a few deal with a seriously narrow bandwidth of organizations.
It’s always best to think of your charitable giving as an investment into creating a better world. A better world for you, a better world for your family, a better world for your family’s family.
Want to stay protected throughout your real estate donation process? Check out StudentReach’s top tips:
Don’t buy into pressure: Scammers use tricks like making you think that you have heard of their charity before, and will pressure you to use them as they are so ‘known’. Do not lower your resistance, feel free to even call them out on it!
Don’t click on suspicious links or attachments in emails: This goes without saying, but if it looks like spam, it probably is.
Never give out personal information: After reading this article, you now know everything required from you in order to complete a valid real estate donation. Don’t give out any personal information unless you’re 100% sure the charity is legitimate.
Go for trusted charities and confirm this through online research: Always double-check a charity’s status through their official website. If they don’t have one, or they do but it looks suspicious, avoid it.
Find out how your real estate donation will be used: It’s already known that charities will sell your property and use the cash for the needs of the less fortunate. However, you must find out exactly what the cash will be used for. What is the charity’s mission? What is its purpose? Who are they helping? It’s vital to find all of this out before you make any big decisions.
Keep receipts and notes for EVERYTHING: You never know what can go wrong at any time, always make sure to keep track of everything throughout the whole donation process. This includes any and all documents and receipts.
Websites you can use to check: There are many websites out there that you’re able to utilize in order to check whether or not a charity is legitimate. CharityWatch and CharityNavigator are the main two, but you can do a quick google search and find others.