Former NFL owner Dan Snyder donated his $35 million mansion to charity after reportedly not being able to sell it, creating some interest in the tax strategy behind such a move. Despite the American Cancer Society selling the mansion two months later, the idea of donating appreciated property to charity for tax benefits is not new. Many individuals use this strategy to take advantage of the tax laws that govern these contributions, including claiming the fair market value of the property as a deduction and not having to pay capital gain tax on any appreciation.
One of the main benefits of donating appreciated property to charity is the ability to claim the full fair market value of the property as a deduction, without having to pay capital gains tax on the appreciation. This can be a huge tax benefit for individuals who have held the property for more than a year and would otherwise be subject to long-term capital gain taxes if they sold the property. By donating the property to a qualified public charity, individuals can avoid paying taxes on the appreciation and receive a tax deduction for the full value of the property.
The amount of tax deduction an individual can claim for charitable contributions is subject to certain limits based on their adjusted gross income. There are rules that dictate how much of a deduction can be claimed in any given year, with most charitable contributions allowed to take up to 60% of the donor’s adjusted gross income. If the donor’s income is not high enough to claim the full deduction in the year of the donation, the remaining deduction can be used in subsequent years, up to five years after the donation was made.
Valuation of the donated property is a key issue when it comes to claiming tax deductions for charitable contributions. While it is relatively easy to value stocks and other liquid assets, valuing real estate can be more complicated, especially if the property is difficult to sell. Donors are required to obtain a qualified appraisal to determine the fair market value of the property for tax purposes. It is also important to ensure that the charity receiving the donation is a qualified organization, as donations to individuals, political organizations, or candidates are not tax-deductible.
For donations of noncash property valued at over $500, donors must complete IRS Form 8283 and attach it to their tax return. Donations of items worth over $5,000 require an appraisal by a qualified appraiser, as well as completion of Section B of Form 8283. If the charity that receives the donated property sells, exchanges, or disposes of it within three years, they are required to file Form 8282, Donee Information Return, within 125 days after the disposition. Failure to file the required information return can result in penalties for the organization.
In addition to these rules, the IRS has detailed guidelines for valuing noncash items and determining the tax implications of charitable contributions. Donors cannot deduct the value of their time or services, or the fair market value of benefits received in exchange for donations. Understanding these rules and regulations is crucial for individuals looking to take advantage of tax benefits through charitable contributions, whether in the form of real estate, stocks, or other property.
