Why donate appreciated real estate instead of cash?

Donating appreciated real estate (land, a rental, commercial property, or a vacation home held long term) can deliver two major tax advantages compared with selling first and donating cash:

  • You generally avoid capital gains tax on the built‑in appreciation. That can preserve more value for the charity.
  • You may claim a charitable income tax deduction equal to the property’s fair market value (FMV), subject to adjusted gross income (AGI) limits and substantiation rules.

In my practice advising clients for 15+ years, I’ve seen this strategy convert illiquid, gain‑heavy holdings into large philanthropic gifts while producing meaningful tax savings. But it’s also administratively and legally more complex than writing a check.

Sources: IRS Publication 526 and IRS Form 8283 guidance (see links below).

Key tax rules you must know

  • Long‑term holding requirement: To claim an FMV deduction, the property must generally be long‑term capital gain property — owned for more than one year. If held one year or less, the deduction is limited to the donor’s basis in the property (see IRS Pub. 526).

  • AGI percentage limits: For gifts of appreciated real property to public charities, the deduction is generally limited to 30% of your AGI when claimed at FMV. Donations that exceed the limit may be carried forward for up to five additional years (subject to the same limits each year). Different limits apply to gifts to private foundations or for certain types of property — check IRS guidance for specifics (IRS Pub. 526).

  • Substantiation and appraisal: For noncash gifts over $500 you must file Form 8283 with your tax return. If the deduction for a single piece of donated property exceeds $5,000, the IRS generally requires a qualified written appraisal and completion of Section B of Form 8283 by the appraiser (see Form 8283 instructions and IRS Publication 561).

  • Mortgages and encumbrances: Donating property that’s subject to a mortgage or lien complicates the tax outcome. If you transfer property encumbered by debt, the amount of your deduction and potential tax consequences depend on who is liable for the debt and whether the charity assumes it. Discuss this with your tax advisor and the charity’s counsel before transferring title.

  • Charity disposition: Many charities will sell donated real estate to convert it to usable funds. Some sales can create unrelated business taxable income (UBTI) for the charity in narrow circumstances; the charity handles its tax consequences, but this may affect the charity’s willingness to accept the gift.

Authoritative references: IRS Publication 526, IRS Publication 561, and Form 8283 instructions (IRS.gov).

Step‑by‑step process (practical checklist)

  1. Early planning and charity screening
  • Confirm the recipient is a qualified 501(c)(3) charity eligible to receive tax‑deductible donations. Not all nonprofits are eligible donors for FMV deductions.
  • Discuss the charity’s gift acceptance policy. Many charities have thresholds, due diligence requirements, or decline real estate gifts that create liability or high carrying costs.
  1. Pre‑gift analysis
  • Run numbers: estimate the property’s FMV, your adjusted basis, and the potential capital gain tax if you sold the property. Compare after‑tax proceeds from a sale-and-donate approach versus donating directly.
  • Assess carrying costs and liabilities: environmental issues, tenant leases, pending code violations, property taxes, and outstanding mortgages. These can prevent acceptance or reduce the net benefit.
  1. Obtain a qualified appraisal (if required)
  • If the expected deduction for the property is more than $5,000 you’ll need a qualified appraisal (IRS rules define who qualifies). Use an appraiser experienced in the property type and local market.
  1. Coordinate with the charity and legal counsel
  • Determine whether the charity will accept the property outright, accept subject to encumbrance, or prefer a different vehicle (e.g., a sale by you with donation of proceeds, or a gift via a donor‑advised fund).
  • Have attorneys prepare or review the deed and closing documents. Title transfer must be clean to be effective and persuasive for IRS purposes.
  1. Complete IRS documentation at tax time
  • File Form 8283 for noncash gifts over $500. For gifts with claimed FMV over $5,000, attach the appraisal and ensure Section B of Form 8283 is completed and signed by the qualified appraiser and the charity (see Form 8283 instructions).
  1. Follow up
  • Keep deeds, appraisals, correspondence, closing statements, and receipts. If the IRS asks for substantiation, you must produce it. See our guide on documenting charitable deductions for more detail linked below.

Common scenarios and examples

Example 1 — Direct donation to avoid capital gains

  • Purchase basis: $200,000
  • Current FMV: $500,000
  • Unrealized gain: $300,000

If you donate the property directly to a qualified public charity and meet FMV rules, you may deduct $500,000 (subject to the 30% AGI limit) and avoid paying capital gains tax on the $300,000 gain. If instead you sold the property and donated cash, you’d likely owe capital gains tax first and have less cash to give.

Example 2 — AGI limit and carryforward

  • AGI: $400,000
  • Deduction claimed this year: limited to 30% × $400,000 = $120,000
  • Remaining deduction: $380,000 can be carried forward up to five tax years, subject to annual limits.

These examples are illustrative and simplified; exact tax effects depend on your filing status, other charitable gifts, and specific facts. Consult your tax advisor.

Pitfalls and red flags

  • No appraisal: Claiming FMV without a proper appraisal (when required) risks an audit or disallowance.
  • Environmental liability: Donating contaminated or potentially contaminated property can leave you and the charity exposed to cleanup liability; charities often decline such gifts.
  • Encumbered property: Mortgages or contingent liabilities can reduce or eliminate tax benefit and complicate title transfer.
  • Unsupported FMV claims: Large FMV claims invite IRS scrutiny. Work with qualified appraisers and document conservative valuation judgments.

Alternatives and gift vehicles to consider

  • Donor‑Advised Funds (DAFs): You can sell the property (or the charity can facilitate a sale) and donate proceeds to a DAF. DAFs simplify distribution and give immediate tax recognition for the cash gift.
  • Charitable remainder trusts (CRTs): If you want income for life and eventual support for charity, a CRT can accept appreciated property, sell it inside the trust without immediate capital gains tax, and provide income to you with a remainder to charity. See our glossary entry on Charitable Remainder Trusts: Income and Philanthropy for more on that structure.
  • Planned giving for business owners: Business owners with concentrated holdings may prefer specialized solutions. See our piece on Planned Giving for Small Business Owners for tailored strategies.

Documentation checklist (what to keep)

  • Deed and closing statements
  • Qualified appraisal report (when required)
  • Signed Form 8283 (and attached appraisal if >$5,000)
  • Written acknowledgement from the charity (receipt) describing the donated property and whether you received goods or services in return
  • Environmental reports, lease schedules, and title searches if available

For practical details on substantiation and receipts, review our article: How to Document Charitable Deductions for the IRS.

What I tell clients (practical advice)

In client engagements I prioritize three questions: Will the charity accept the property? Do the tax math and compare sale‑then‑donate vs donate‑direct? What are the legal and environmental exposures? If a charity won’t accept the property or if liabilities are significant, we pursue alternatives such as selling the property and using a donor‑advised fund or a charitable trust. Always get an appraisal and coordinate early with the receiving charity; last‑minute attempts often fail.

Where to read the official rules

Professional disclaimer

This article is educational and does not constitute tax, legal, or investment advice. Rules for charitable deductions are complex and facts matter. Consult a qualified tax advisor, attorney, and the receiving charity before completing a real estate donation.

If you’d like, I can walk through a modeled example using your property’s basis, FMV, mortgage balance, and AGI to show the estimated tax outcome and the likely net benefit to the charity.