The economic downturn hit local charities particularly hard. Many people have also been left holding real estate that no longer has the allure it did at the height of the real estate bubble. Donating real property offers many advantages, but it is important to consider the tax ramifications before you make such a gift.
If you give real property to a public charity, like a church or school, you are allowed to deduct the property’s fair market value and avoid capital gains taxes. Be careful how you value your donation. For property worth over $5,000, you must have it appraised by a qualified appraiser. Also, if the charity sells the real property within three years, it must report the sale price to the IRS, so if you have reported significantly more value on your income tax return than the sale price, the IRS could challenge your deduction.
There are a number of pitfalls for the unwary when donating real estate. You generally do not want to donate property subject to a mortgage, and you also want to be careful about donating real estate to a charity you established, as there are strict self-dealing rules that apply.
There are other options than simply donating your real property, such as a charitable gift annuity, Charitable Remainder Trust, conservation easement and Charitable Land Trust. You should consult your attorney and/or tax professional to determine your best option.