If you itemize your federal deductions on Schedule A, charitable donations are tax-deductible -- the charitable donation deduction is one of the few that you can claim if you're subject to the Alternative Minimum Tax. When you use it to donate rental property that has gone up in value, it's particularly valuable since you get to claim the property's fair market value instead of the depreciated cost basis that would be used to calculate capital gains and depreciation recapture taxes. One of the keys to doing this is to hold the property for at least one year before donating it, so that your gains become long-term gains.
To be able to deduct donating your rental property, you have to give it to an IRS-approved charitable organization. Governments and churches are always acceptable, even if they haven't registered with the IRS. Otherwise, the organization must be listed in the IRS database of exempt organizations, which is available online (see link in Resources).
One of the biggest benefits of donating rental property is that the deduction is figured on the property's fair market value. For example, if you bought a rental home for $50,000 and claimed $20,000 in depreciation on it but it had a $100,000 fair market value, you'd be able to write off the $100,000 value. While the IRS sometimes limits your ability to donate depreciated properties, this limitation doesn't apply to depreciated real estate. When you donate property, you will need to have a professional appraiser prepare an appraisal report to establish its fair market value.
The IRS limits how much money you can write off in donations in a given year. There are two classes of charities -- churches, educational institutions, hospitals, governments, publicly supported charities, foundations supporting public colleges, and most private foundations are subject to the higher limits; you can donate up to 50 percent of your adjusted gross income to them in a year or up to 30 percent of your income in appreciated property. The latter limit applies to a donation of appreciated rental real estate. Other charities are subject to a 30 percent limit that goes down to 20 percent if you are donating appreciated property. However, if you give more than your limit, you can carry the extra amount over for up to five years.
A Sample Donation
For high-income individuals, the value of the write-off can come close to equaling the after-tax value that can be achieved by selling a property. If a couple with a pre-donation taxable income of $500,000 chose to donate a $100,000 home, the donation would be worth $39,600 at the 39.6 percent tax rate. If they lived in Massachusetts, which has a 5.3 percent flat tax rate, they'd also save $5,300 in state taxes for a total savings of $44,900. On the other hand, if they sold the property for $100,000, they'd have to pay brokerage commissions and closing costs and would probably net around $93,000. They'd have to pay 25 percent federal depreciation recapture tax, 5.3 percent Massachusetts tax and the 3.8 percent Medicare surcharge on their $30,000 in accumulated depreciation, costing them $10,230. In addition, their $43,000 in profit after closing costs would be subject to 20 percent federal capital gains tax as well as the Medicare surcharge and state tax. Those taxes would cost them an additional $12,513. Their after-tax proceeds from the sale would be $70,251, just $25,357 more than the value of the write off. In other words, this couple can donate a $100,000 property, and it will cost them only about $25,000.
- IRS: Publication 526 - Charitable Contributions
- Arizona State University Foundation: Giving Real Estate
- IRS: Publication 561 - Determining the Value of Donated Property
- Forbes: IRS Announces 2013 Tax Rates, Standard Deduction Amounts and More
- Tax Policy Center: Individual State Income Tax Rates 2000-2011, 2013
- API Exchange: A 92 Year-Old Solution for Real Estate Investors Facing Higher Taxes in 2013
Steve Lander has been a writer since 1996, with experience in the fields of financial services, real estate and technology. His work has appeared in trade publications such as the "Minnesota Real Estate Journal" and "Minnesota Multi-Housing Association Advocate." Lander holds a Bachelor of Arts in political science from Columbia University.