In central Texas, an anonymous donor gave his house to a local charity that supports students in low-income communities who will be the first generation in their families to attend college. Starting in the sixth grade, the children get leadership experiences, advising, and tutoring. The charity was able to sell the donated house for nearly $700,000, and both the donor and the charity were overjoyed by the amount of help the house was able to provide. If the donor had sold the home himself, the donated amount would have been much lower because of all the fees associated with real estate transactions, as well as the taxes he would have had to pay. This example and others like it are encouraging more and more people to consider donating houses to non-profit organizations in their own communities.
Why Donate A House
Charitable donations are one of the best ways people can make a positive difference in the world. Donations are an important part of the legacy people leave for the next generation. Philanthropy is not only for the super-rich; in fact, individuals at any level of income can experience the joy of sharing what they have. Many people who feel a strong commitment to support a particular charitable organization consider donating their houses, either by transferring the title of an unoccupied house or leaving a house in a will. Since the donor can usually take a tax deduction, the transaction can be a great “win-win” for both the donor and the charity.
How Donating A House Can Help A Non-Profit
Non-profit organizations can get a huge benefit from the donation of a house, no matter how they decide to use the property.
Donations Give Full Value
If a homeowner sells a home and then donates the profit from the sale to a charity, the charity receives the sale price minus fees, like closing costs, and any capital gains tax the owner will owe to the IRS. But if a homeowner donates a house outright, the charity receives the full value of the property and has several options for using the house.
The Charity Can Sell The House
The non-profit may choose to sell the house immediately and will most often do that if there is a mortgage claim that needs to be settled. Selling the house is also the best way for the charity to get a large infusion of cash. In addition, by selling the house right away, the organization will have no need to pay taxes on capital gains. Donors who have a strong sentimental attachment to a house should be aware that a donated house may be sold by the charity and may then be demolished in order to make room for a new development.
The Charity Can Rent The House
Alternatively, a non-profit can rent the house and earn a monthly income. This can be an easy option if the house was already being used as a rental property or vacation home. The income can be very beneficial in contributing to the organization’s ongoing operating costs.
The Charity Can Use The House
In some cases, depending on the location and condition of the house, a non-profit organization is able to put a donated house to use. For example, some donated homes have become office spaces for charities, and others have become shelters and halfway houses for the people whom the charity serves.
How Donating A House Can Benefit The Donor
Donating a house can also help the donor in many ways. Most of all, it can relieve the homeowner of a burden, and it can provide a helpful tax deduction.
Getting Rid Of Burdensome Property
For one thing, donating a house can be a good way to get rid of a property that is difficult or costly to maintain. For example, a homeowner who inherited a property in another state had no interest in moving into the house or renting out the property long distance. The cost of keeping up the house and paying property taxes seemed burdensome, as did the cost of selling the property through a real estate broker. The homeowner eventually donated the home to a charity he supported and was relieved of the burden for caring for the property.
Eliminating Capital Gains Tax
Making a donation can also help the donor avoid capital gains tax. A capital gains tax is a tax that is owed on the amount a property increases in value between the purchase and the sale. In other words, if a house was purchased for $150,000 and then sold ten years later for $250,000, the owner would owe taxes on $100,000 in the year in which the house was sold. When a house is donated, on the other hand, the capital gains disappear.
Providing A Tax Deduction
In addition, donating a house allows for a tax write-off of the fair market value of the property, minus any unpaid mortgage balance. Being able to deduct the value of a house can make a significant difference on tax returns. However, if the tax deduction is your primary motivation in donating a house, it will be a good idea to consult with a financial advisor to make sure you understand exactly how the deduction will impact your tax return.
How Donating A House Works
The process of donating a house can vary according to several factors, like the condition of the house, the amount of debt still owed on the house, and the owner’s needs.
Step One: Choose The Recipient
Although homeowners are free to donate houses to any individual or organization, they will only get a tax deduction if they donate to a non-profit approved by the Internal Revenue Service. To search for an eligible organization, visit www.irs.gov, click on the Charities and Non-Profits tab, and then select Exempt Organizations Select Check. Note that some eligible organizations, such as churches and governmental units, may not be listed in the database, but the website includes instructions for donating to other eligible organizations.
Step Two: Determine The Method Of Donation
A house can be donated in several ways. The simplest method is to transfer the title from the current owner to the charitable organization, and this is the best method when the house is not occupied. If there is no outstanding mortgage, then the charity will be able to receive the full value of the house. A house with a mortgage, however, represents a liability for the charity, so not all non-profits will accept a house with a mortgage. However, some donors transfer the title and continue to live in the home while they pay off the mortgage. This is known as a living trust. The house then becomes available for use by the non-profit when the homeowner has paid off the mortgage and/or no longer resides there. Another way to donate a house is to leave it to a charitable organization in a will.
Step Three: Fill Out The Paperwork
Paperwork is an inescapable part of any legal transaction, so house donors should be prepared to fill out some forms. These typically include a quit claim deed, a warranty claim deed, a donation agreement, and a deed and gift declaration. The donation agreement will ask for specific information about the house, its estimated value, and any requirements or requests the donor would like to make regarding the use of the property. This phase of the donation process will also require a title transfer fee, paid by the donor, in order to put the house in the non-profit’s name.
Step Four: Get The House Inspected And Appraised
It is the responsibility of the donor to get the house inspected and to get an independent appraisal to determine fair market value. This sum is generally calculated based on the condition of the house and the sale price of other comparable homes in the neighborhood. The fair market value is the amount that the donor can deduct from his or her taxes.
What Types Of Property Can Be Donated
While this article will focus on donating houses, there are actually many other types of residential, industrial, and commercial properties that can qualify as charitable donations. Other residential properties that can be donated include attached and semi-detached homes, like condominiums and duplexes; mobile homes; apartment buildings; and hotels. Industrial properties include warehouses, cold storage buildings, manufacturing buildings, and showroom buildings, to name a few. Commercial properties can include stores, restaurants, office buildings, garages, and medical buildings. It is even possible to donate land, a house, or other building in another country.
Consider Donating A House
Giving to charity is a wonderful way to give back to your community and to make a concrete and positive difference in the world. A piece of property is a significant donation and can really contribute to the good work of a charitable organization. If you are considering selling a house and have a passion for giving to others, think about making a donation of your home to the charity of your choice.