Yes, if transferred to another entity you will have to season the title before donating to achieve appraised value write off. Depending upon your motivation that may or may not work best for you. Another potential trap occurs when the charity disposes of the asset, which they often are not highly motivated to seek the highest and best value, (that which is determined via the appraisal), but sometimes any liquid price is better than holding the asset longer term in an attempt to realize closer to appraised value.
Here are some other considerations: (some of which you may know but posted details for further consideration… even if not faced with the Dealer issues). As you can see the liquidation price is highly relevant to the amount of your write off permitted if the charity liquidates the property within 3 yrs, and of course most will do so.
“For property worth more than $5,000, you generally must have it appraised by a qualified appraiser,
file Form 8283 with your federal tax return and have your appraiser sign the form.”
“If the charity disposes of the property within three years, the IRS requires it to report the sale price on
Form 8282. If the price is significantly less than the value you reported on your income tax return, the
IRS may challenge your deduction.”
Posted by Natalie-VA on January 10, 2011 at 08:55:10:
Hello All,
I will, of course, consult with my CPA. Does anyone here have experience donating land to charity?
I have a few questions. Subject property was purchased in Dec 2009 for 32k. Current appraisal is probably 75-100k.
What would the write-off amount be for federal taxes? Is it based on the appraised value, since we have owned it for over a year?
Is that amount limited, based on income or any other factors?
The corporation holding title to this property has been used for short term real estate holds/dealer transactions. Does that impact the amount of the write-off?
Re: donating land to charity-UPDATE - Posted by Natalie-VA
Posted by Natalie-VA on January 14, 2011 at 12:02:13:
After speaking with my CPA, it seems that you cannot always deduct the appraised value of land (held longer than one year) if you donate it to charity. It depends if this would have been ordinary income or capital gains income. Since I own this piece of property a in a corp that is dedicated to short term flips (ordinary income), it’s pretty obvious that my original intention was to flip the property and not hold it. Therefore, according to my CPA, I can only deduct my basis, not the appraised value.
Re: donating land to charity - Posted by David Krulac
Posted by David Krulac on January 10, 2011 at 09:16:43:
Donating appreciated assets is a great way to dispose of land or other real estate.
The charity that you are donating the property to must actually want to accept the donation. surprisinly or maybe not, some charities don’t want the bother or hassle.
The charity must be an IRS approved charity. Governments, churches, schools and others are usually ok, but some “so called charities” may not be approed by the IRS and therefore are not a good candidate to be a donee.
If the value of the donated property is more than $500, then there MUST be an appraisal. At one time the IRS did accept the real estate assessment as an indication of value, but they may have tightened that requirement. Or the assessment may be substantially lower than you want to accept as the donor as the value. You will have to bear the costs of the appraisal, which could be $400 or more depending on the property.
Adjoinig nproperty owners, if a charity are good possible donees. churches, Habitata for Humanity, state & local government, schools, are usually good candidates.
The IRS porcess used to be a lot looser, but in recent years the process has been tightened becuase of abuses. There is a trap if the donee sells the property and gets substantially less than your appraisal. The lower value could become our donation value. This often happens when the donee sells at a distressed type price looking to get any money as opposed to maximum money. Often times they put in a half hearted effort to sell, sell to the first offer at a substantial discount, without exposing the property to amrketing and competitive bidding.
Capitalization/income question. JT? Dave T? - Posted by Kristine-CA
Posted by Kristine-CA on January 15, 2011 at 21:35:28:
I’m confused about your CPA’s take on the income and capitalization. My reading of the IRS regs didn’t help much.
When donating land to charity, is one required to prove to the IRS the original “intent” of an investment? What if it’s not an investment but something inherited? Why isn’t an appraised value of the the donated asset sufficient? Why is Natalie limited to basis only?
Re: donating land to charity - Posted by Natalie-VA
Posted by Natalie-VA on January 11, 2011 at 09:04:20:
Thanks for your response, David.
In my case, the assessment is 130k. I wish it would appraise for that, but I doubt it.
I was considering donating to Habitat for Humanity; however, I am also looking at a state tax credit of 40% (not a typo). My local Habitat for Humanity chapter is not participating in this particular program, even though most other chapters in my state are participating. I will probably donate to another charity that participates.
Do you have any idea how long the “lookback period” might be if the charity sells the land and receives much less than the appraised amount?
Lastly, do you think the fact that my s-corp, which does dealer transactions, has any effect on all of this?
We all agree that dealer realty is inventory to a proprety flipping business. Natalie’s CPA is apparently treating the real estate that is to be donated as inventory to her property flipping business.
The general rule is that inventory held for sale to your customers in the ordinary course of your trade or business is donated at basis, and no appraisal is needed even if the FMV of the property is greater than $5K.
Natalie could always claim that she originally purchased the property to flip or develop but her intent changed when market forces did not support that strategy, and therefore she decided to hold the property as an investment.
The pitfall here is that if the property was always for sale until Natalie decided to donate it, then in an audit the IRS will most likely deem the property to be dealer realty at the time of the donation.
Perhaps Natalie’s CPA has some thoughts on steps she could take to have the property classified as an investment holding rather than as dealer realty.
Re: Capitalization/income question. JT? Dave T? - Posted by Kristine-CA
Posted by Kristine-CA on January 16, 2011 at 10:50:44:
Thanks for this explanation. Describing the land as business inventory
helps me understand the IRS requirement that basis be used as the
donation value.
As to re-classifying the property: can a different entity owned by
Natalie, or in which Natalie has an interest, buy the property as an
investment from her flipping corp and then donate? Can she buy it
herself from the corp? Natalie’s original desire to donate may have
been to offset the corp’s income, but depending on the entire tax
picture, could a different entity buying and then donating help
accomplish this?
Re: Capitalization/income question. JT? Dave T? - Posted by Natalie-VA
Posted by Natalie-VA on January 17, 2011 at 09:16:30:
Hi K,
As I mentioned off board, I think if I transferred the property to another entity, I would have to hold it for another year in order to get the benefit of using appraised value.
Also, in response to Dave’s thoughts about trying to reclassify the property…even though I have not had it listed for sale, it was purchased in 2009 and included in the work in progress numbers on that year’s tax return. I would think that would make it even more difficult to reclassify it.