Former NFL owner Dan Snyder recently donated his $35 million mansion to charity after not being able to sell it. The donation created some buzz around this unusual strategy, especially when it was revealed that the American Cancer Society, the recipient of the mansion, was selling it just two months later. However, donating appreciated property to charity is a common tax strategy used by many others with real estate and various types of property. The key benefit of donating in kind is claiming the fair market value of the property as a deduction, as well as avoiding paying capital gains tax on the appreciation. This is particularly beneficial if the property has been held for over a year.
The ability to claim the entire value of the property as a tax deduction can be a significant advantage, especially for properties that have appreciated significantly. Rather than selling and paying capital gains tax on the appreciation, donating the property to a qualified public charity can provide substantial tax benefits. However, the timing and extent of the tax benefit depend on the donor’s income, as there are limits on how much of a deduction can be claimed in a single year. These limits can vary based on income levels and the type of property being donated, with a general cap of 60% of adjusted gross income for most charitable contributions.
Valuation of the donated property is a critical factor when making a charitable contribution, especially for real estate. While determining the fair market value of publicly traded stock is relatively straightforward, assessing the value of real estate or other noncash contributions may require a qualified appraisal. It is essential to ensure that the chosen charity is qualified to receive tax-deductible contributions, as donations to individuals, political organizations, or candidates are not eligible for deduction. The IRS maintains a list of all qualified charities, and donors can verify the tax status of the organization before making a contribution.
Donations of stock, vehicles, clothing, household items, or other property are subject to specific rules regarding valuation and documentation requirements. For noncash contributions exceeding $500 for the year, donors must complete IRS Form 8283 and attach it to their tax return. If the donated item is valued at more than $5,000, an appraisal by a qualified appraiser is necessary. Organizations receiving charitable deduction property are required to file Form 8282 if the property is sold, exchanged, or disposed of within three years. Failure to file this information return may result in penalties.
Various rules govern charitable contributions, including restrictions on deducting the value of time or services and limitations on deductions for donations entitling the donor to benefits. Understanding these rules and requirements is essential to maximize the tax benefits of charitable giving. IRS Publication 526 provides additional information on charitable contributions, while IRS Publication 561 offers guidance on valuing noncash items. Donors should familiarize themselves with these rules to ensure compliance and optimize the tax benefits of charitable giving.
