Posted by Lee Sausen
Are you a generous person that regularly donates cash to qualified charitable organizations? If so, you are used to taking the dollar amount as an itemized deduction on Schedule A every year. Have you ever thought of donating noncash property, specifically real property (as opposed to personal property)? There are advantages to be considered.
First, it is important to understand the Adjusted Gross Income (AGI) limits on the deduction for charitable contributions. The deduction limitation depends on the type of organization that receives your donation. The two most common types of tax-exempt organizations that you might be considering donating to are “public charities” (50% AGI limit) and “private nonoperating foundations” (30% or 20% AGI limit, depending on the type of property you donate). To illustrate, let’s say that your 2015 AGI totaled $100,000 and you contributed $55,000 cash to a public charity. Your charitable contribution itemized deduction would be limited to $50,000 ($100,000 x 50%) with a $5,000 carryover for up to five years. See the Exempt Organizations Select Check on the IRS website to determine which type of organization you are considering.
Contributing real property is less straightforward. For the purposes of this excerpt, we will assume that we are dealing with real estate that has increased in value since the time of purchase and that the property has been held for more than a year.
When contributing appreciated real property to a 50% limit organization (e.g., public charities, churches, hospitals, and others), the taxpayer has two options. First, assuming that you are not in a depreciation recapture situation, you can choose to deduct the full fair market value (FMV) of the property which would then be limited to 30% of AGI (versus 50% of AGI for cash donations). Your second option is to deduct your basis in the property (basically – the amount you paid for it) which is then subject to the more favorable 50% AGI limit. A calculation and projection of other factors would need to be evaluated to determine the best option in your situation. Keep in mind that these limits are separate and distinct from the deduction limitations governing cash donations. The deduction of a contribution of real property does not reduce the limit on cash contributions. However, the taxpayer cannot have a total deduction for charitable contributions greater than 50% of their AGI.
Contributions of real property to a 30% limit organization (private nonoperating foundations, veterans’ organizations, and others) are evaluated slightly differently. The taxpayer can only deduct their basis in the property (no FMV option), which will then be limited to 20% of AGI (versus 30% of AGI for cash donations).
If you do not qualify to take the residence gain exclusion ($250,000 or $500,000 if married filing jointly in 2015) on the sale of your primary residence, donating it to charity might be a good option. Avoiding the income recognition from capital gain is the obvious advantage – this applies to all types of real estate including investment properties, second homes, and rentals. Furthermore, the IRS allows you to carryforward any unused portion of your contribution (that amount exceeding the applicable AGI threshold) for five years. If you are in a situation where you expect your income to rise significantly from some transaction (for example, a traditional IRA to Roth conversion), planning to donate a piece of real property the same year may help with such an event.
For all donations of real property, there are a few points to strongly consider before following through. If you would like to know more about these types of contributions, consult your tax advisor for assistance with income and estate tax planning.