Introduction

Donating real estate can be one of the most tax-efficient ways to give because it often lets donors claim a charitable deduction for the property’s fair market value while avoiding capital gains tax on appreciation. But the rules are specific: the type of property, how long you’ve owned it, the charity’s status, and documentation requirements all affect the tax outcome. Below I lay out practical steps, IRS references, pitfalls to avoid, and alternative vehicles that often preserve more tax value for both donor and charity.

Why real estate donations can be tax-efficient

  • Fair market value deduction: If you donate real property (e.g., rental property, second home, land) that you’ve owned for more than one year to a qualified public charity, you generally may deduct the property’s fair market value (FMV) on your federal income tax return, subject to AGI limits (see limits below). This is more advantageous than selling the asset first and donating cash because selling would trigger capital gains tax on the appreciation.

  • Capital gains avoidance: Donating appreciated property avoids the capital gains tax you would owe on a sale. For example, if you bought a rental for $200,000 and its FMV is $500,000, donating directly may let you deduct $500,000 and avoid tax on the $300,000 gain.

Key IRS rules and authoritative sources

  • Qualified charities and verification: The donee must be a qualified tax-exempt organization (typically a 501(c)(3) public charity). Verify status using the IRS Tax Exempt Organization Search (IRS). (See IRS: Charitable Contributions.)

  • Holding period and valuation: To claim FMV for appreciated property, you generally must have owned the property for more than one year. If you owned it one year or less, deduction is limited to your basis (what you paid). (IRS Publication 526 and Publication 561.)

  • AGI deduction limits: Gifts of appreciated real property to public charities are generally limited to 30% of your adjusted gross income (AGI). Gifts to certain non-public charities (private foundations) may be limited to 20% of AGI. Excess amounts can usually be carried forward up to five years. (IRS Pub. 526.)

  • Appraisals and Form 8283: If your claimed deduction for a noncash gift is more than $500, you must complete IRS Form 8283 and attach it to your return. If the deduction is more than $5,000, you must obtain a qualified written appraisal and complete Section B of Form 8283; the charity’s signature is generally required. (Form 8283 instructions; IRS Pub. 561.)

Practical donation pathways and when to use them

1) Direct gift of real property to a public charity

  • Best when the charity will use the property or can accept and sell it easily. Public charities can often sell donated property without paying income tax, putting proceeds to work quickly. (Check the charity’s policies in advance.)
  • Pros: Full FMV deduction (if >1 year owned), avoid capital gains, large immediate deduction.
  • Cons: Some charities cannot accept complex properties (environmental issues, tenant leases, mortgages). Due diligence is essential.

2) Donate to a donor-advised fund (DAF)

  • Donating appreciated real estate into a DAF run by a sponsoring organization can be efficient when you want a current tax deduction but wish to recommend grants over time. DAFs may provide expertise to sell the property and convert it into cash for grants. See FinHelp’s Donor-Advised Funds: A Practical Guide for more on when DAFs make sense.

3) Use a charitable remainder trust (CRT)

  • A CRT allows you to transfer property to an irrevocable trust: you (or named beneficiaries) receive income for life or a term of years, and the remainder goes to charity. CRTs can provide an income stream, immediate partial charitable-income tax deduction, and removal of the asset from your estate. See FinHelp’s Charitable Remainder Trusts Explained for details.

4) Bargain sale or partial gift

  • A bargain sale is a sale to a charity at less than FMV; you get a partial deduction for the charitable gift portion and recognize gain only on the sale portion. Donating a partial interest in personal property generally does not qualify for deduction (IRC 170(f)(3)); consult counsel before attempting fractional gifts.

5) Sale then donate (when property is difficult to give)

  • If the property has title, environmental, or mortgage complications, selling the property and donating net proceeds may be simpler. This produces a smaller tax benefit (you’ll pay capital gains tax on sale) but avoids the transaction risk for the charity.

Things that commonly surprise donors

  • Mortgages and liabilities: If the property is subject to a mortgage, the deduction may be reduced by the amount of debt relief the charity assumes. The IRS treats contributions of encumbered property differently; get specialized tax advice before donating mortgaged real estate. (IRS Pub. 526.)

  • Not all charities can accept property: Many small charities do not have systems to accept, hold, or sell real estate. Larger public charities, community foundations, or DAF sponsoring organizations are likelier to accept. Always confirm acceptance in writing.

  • Environmental and title risk: Donating contaminated land or property with title defects can harm the charity and jeopardize the deduction. A pre-donation environmental assessment and title review are prudent.

Checklist: Steps to donate real estate tax-efficiently

  1. Verify the charity’s status and willingness to accept the property (IRS Tax Exempt Organization Search).
  2. Get a qualified appraisal (required if deduction > $5,000) and read IRS Pub. 561 on valuation.
  3. Confirm holding period (owned >1 year for FMV treatment).
  4. Confirm whether the property has mortgages, liens, tenants, or environmental issues and how the charity will handle them.
  5. Complete Form 8283 with the charity and attach it to your return when applicable.
  6. Coordinate with your CPA and executor if estate tax or income planning is a concern.

Worked example (illustrative)

  • Purchase price (basis): $200,000
  • Current FMV: $500,000 (owned >1 year)
  • Tax outcome if donated directly to a public charity: Potential $500,000 charitable deduction (subject to AGI limits), and avoidance of capital gains tax on the $300,000 appreciation.
  • Tax outcome if sold first (simplified): Assume long-term capital gains tax + NIIT ~ 23.8% on $300,000 = ~$71,400 tax. Net cash to donate after tax ~ $428,600 vs donating full $500,000 in value directly.

This simple example shows why direct donation of appreciated property often yields a greater charitable and tax outcome than selling first.

When to prefer alternatives (DAF or CRT)

  • Donor-Advised Fund: If you want the immediate tax deduction but still want control over timing of grants, and the DAF sponsor can accept and sell real estate efficiently, a DAF often wins. (Read more: Donor-Advised Funds: A Practical Guide.)

  • Charitable Remainder Trust: If you need income from the property (for retirement or to smooth taxable income) while passing the remainder to charity, a CRT converts the asset to an income stream and spreads tax benefits over time. (See Charitable Remainder Trusts Explained.)

Documentation and audit risk

  • Keep sale offers, appraisal reports, deed records, environmental assessments, and the charity’s written acceptance. The IRS scrutinizes high-value noncash gifts, so thorough documentation is not optional.

Common mistakes to avoid

  • Assuming any charity can accept property—confirm in writing.
  • Forgetting Form 8283 and appraisal requirements—this can disallow large deductions.
  • Ignoring encumbrances or environmental issues—these can turn a generous gift into a tax headache.

Professional insights from practice

In my 15 years advising clients, a few repeated lessons stand out:

  • Pre-screen charities and have an exit plan: If the charity cannot sell the property, the time-to-liquidity and the donor’s desired timing matter.
  • Use advisors early: A CPA, real estate attorney, and the charity’s development office should be involved from the start.
  • Consider staged giving: If deduction limits will be exceeded, consider donating a portion now and carrying forward the remainder or using a CRT/DAF to smooth tax benefits.

Resources and authoritative links

Internal resources at FinHelp

Professional disclaimer

This article is educational and does not constitute tax, legal, or investment advice for your situation. Tax rules change and outcomes depend on individual facts. Consult a CPA, tax attorney, or qualified financial advisor before making major charitable gifts of real estate.

Bottom line

Donating real estate can magnify the impact of your charitable giving while delivering meaningful tax benefits when done correctly. The keys are confirming the donee’s ability to accept the gift, documenting FMV with a qualified appraisal, understanding AGI limits and mortgage implications, and picking the right vehicle (direct gift, DAF, CRT, or sale-then-donate) to match your financial goals and timing.