When her husband, 1980s filmmaker John Hughes, died Nancy Hughes did what many widows do and decided to downsize. However, she did something unexpected when she chose not to sell the house. Instead, Mrs. Hughes decided to donate the home where she and her husband had built their life together to the Northwestern Lake Forest Hospital. This donation has had numerous benefits for not jus the hospital, but other Chicago area charities as well since the hospital has lent out the property to other charities. While it’s hard to know the specifics of this particular deal but often times donating land or a home can have immense tax benefits for the donor. In fact if you are looking to sell a property yourself, it is worth considering donation as a possibly more lucrative alternative to selling.
The first things you’ll want to do is choose a charity that is close to your heart. But before you transfer the deed, there are a few things you’ll want to keep in mind. Not all not-for-profit organization is eligible to accept a donation that you, the donor, can receive a tax write off for. You need to make sure the charity you are donating to is designated as a 501(c)(3) or 501(c)(13) organization. Each state has slightly different laws so there may be other charities that are eligible so make sure that you look into the specific tax code of your region, but looking for charities that meets one of these two classifications is a good rule of thumb. Some categories of charities that are usually a safe place to start include: Religious institutions, Educational institutions, Scientific facilities, Charitable organizations, Literary institutions, organizations that serve Public Safety, and Prevention of Cruelty to Animals or Children. If you go to Guidestar.org you can find a comprehensive list of not-for-profits that you can donate to qualify for the tax write off.
Once you’ve chosen your charity you’ll need to determine the property’s value. There are plenty of tools online that will give you a rough estimate of how much your house may be worth. Unless you are claiming less than a $5,000 deduction, you will need a professional appraiser to evaluate the property. It’s important to note that in most cases, the donor is responsible for covering the costs associated with the donation. Hiring an appraiser would fall into that category so be prepared to cover those costs.
One of the benefits of donating your house is that the tax write off is determined based on the market value of the property and not what you paid for it, so the appraiser is a worthwhile investment. Make sure that you keep track of the report that outlines the professional appraiser’s findings, as you’ll need to attach that to your taxes. If you are worried about the cost of an appraisal, Seth Williams quotes the cost of residential appraisals averaging around $500 and commercial appraisals averaging around $1,500 in his article “Tax Hacks: How To Donate Real Estate And Kill Your Tax Bill.”
There is some documentation just to verify the validity of the donation. Keeping a copy of the purchase agreement will demonstrate that the property transferred happened free of charge. A copy of the deed is also recommended as it is another place that verifies the listing place as being zero dollars. A closing statement is also recommended, like the purchase agreement and a copy of the deed this document verifies that no money was exchanged in return for the property. While this might feel redundant the more proof you can provide when you turn in your taxes the easier it will be for you to get your return in a timely manner. Each state might have additional forms you can fill out as well, check with a CPA in your area who is knowledgeable on the specifics of your local tax code which papers and documentations they deem necessary.
Should you look at donating properties as a way to generate additional income? The short answer is no. It won’t make sense for you to donate a property in every instance. One thing to keep in mind is that the money you’ll be getting back from the donation will come in the form of a tax return. So if you need access to the cash immediately, donating is probably not the best way to go. As well if you aren’t going to owe a lot or any taxes, and the gap between what you paid and what you’ll get if you sell it isn’t huge, selling is probably a better strategy.
So when should you donate? One good time to look at donating is if you’ve got a property with a large gap between what you paid and what the market value is, but it’s not a buyers market. Perhaps this property has been on the market for a long time and it seems reasonable that you’ll receive the tax return before you manage to make a sale. Another time when donating is advisable would be if the gap between purchasing price and market value is large as is the amount you’ll have to pay in taxes. Donating will greatly diminish or even illuminate your tax contribution. Of course altruism is always an excellent motivating factor, but be smart, perhaps waiting a year so that both you and the charity benefit is a good idea if your main motivation is helping the charity of your choice.
As mentioned a few times in this article each individual state has slightly different laws, contacting a certified CPA from the beginning of your property donation journey is advisable. For one thing it will help you assess if donation truly is the best strategy. By looking at the local tax code and having your individual taxes perused and evaluated you’ll have more information that you can factor in to your decision making process. You’ll also know exactly what documentation you’ll need to keep and fill out. The documentation process is not complicated but going back and trying to obtain those papers after the donation has been made can be time consuming and tricky.
Once you’ve made the decision to donate a property to charity you can take comfort in knowing that you not only are going to save money come tax time but that you are helping out institutions that need it. Raising money can be incredibly difficult for not for profits and property donation gives them assets that they can sell if they need the liquidity, or can make us of without having to raise the funds to build or purchase a new building. Choosing a charity that is close to your heart makes the positive value of the donation practically incalculable.