When people begin the process of estate planning or take time to review their existing estate plan, they have many tax considerations to think about. How they distribute their assets will determine what taxes, if any, will apply to their estate. They may consider creating a trust for their children, they might want to “gift” some of their assets to take advantage of evolving tax law, and/or they may choose to donate some of their assets to charity. If you are considering donating real estate to charity as part of your estate plan, it is important to be aware of the possible tax consequences doing so might have.
Charities vs. Foundations
Both public charities and private foundations can be nonprofit organizations if they have applied for and been granted 501(c)(3) status, which means that contributions to such organizations can qualify for tax deductions. However, when real estate is involved, the tax deduction for a donation can vary depending on what type of organization it is.
According to the IRS, all organizations granted 501(c)(3) status are initially considered private foundations unless they apply for and are qualified to be considered a public charity. Public charities are those that typically receive most of their funding from the general public or from governmental units. They also typically have more interaction with the public. These include A private foundation, however, is typically funded from a smaller number of sources or through investment income and is usually governed either by a family or small number of individuals. They are often required to comply with certain operating restrictions and may be subject to certain taxes should they fail to comply with those restrictions.
For the most part, a real estate donation to a public charity allows you to claim a tax deduction equal to the fair market value of the real estate you donated. However, if you are donating real estate to a private foundation, the available amount of your deduction is usually the lesser of either the fair market value of the real estate or your cost basis in the real estate.
Overvaluation and Mortgages
Typically, any real estate donation will require a valid appraisal of the property to be donated accompanied by IRS Form 8283 – Noncash Charitable Contributions. Documenting your appraisal is important to avoid any questions that could arise regarding the value of your deduction in the future. For instance, overvaluing the real estate can result in the IRS challenging your deduction if the charity you have donated to sells the real estate within a certain period for substantially less than the deduction you claimed for it.
If you have a mortgage on the real estate you wish to donate, it is advisable to pay off the mortgage before making the donation. Otherwise, you could be subject to additional recognizable taxable income equal to the value of the mortgage and could cause the charity you are donating to unintended tax consequences.
As with most aspects of estate planning, it is important to make sure that you are adequately prepared for the potential tax consequences related to your estate. Whether you are donating real estate or other assets during your lifetime or as part of the distribution of your assets after your death, proper planning can often alleviate easily avoidable headaches for your loved ones and any charity you may wish to benefit from your estate. An experienced New York estate planning attorney can help you understand the various mechanisms that might help you accomplish the goals of your estate plan more effectively.