TAX HACKS: How to Donate Real Estate and Kill Your Tax Bill

When I got into the niche of land investing, I was pleasantly surprised to learn that it's not difficult to buy properties for pennies on the dollar.

As with anything, when you're looking in the right places and talking to the right people, almost any process can be made easier and more efficient – and real estate investing is no exception.

To my surprise, I found that getting my properties sold was a bigger challenge than buying them cheaply in the first place.

Part of the problem is that I'm not the most patient person. When I list a property for sale, I want it sold today. Not next week. Not next month. Not next year.

NOW.

In some cases, I got lucky and my properties actually did sell in a matter of days – but more often than not, it took at least a month or two to move my inventory, and every once in a while, I found myself stuck with a property that just wouldn't freaking sell.

Whenever I was dealing with one of these stubborn properties (i.e. – listings that sat on the market for more than three months), I would always remember a saying my dad used to say…

“There's more than one way to skin a cat.”

Have you ever heard those words before? It's meaning is simple…

Even though we may have a preconceived notion about how something is supposed to be done, there's almost always an alternative route that will accomplish the same goal.

Granted – sometimes the alternative is more difficult…

Sometimes the alternative is more complicated (hence the reason why nobody does it)…

But every once in a while, the alternative is actually easier than the conventional route we're all accustomed to. The only reason nobody does it is because it's not an obvious solution.

Case in point…

Let's look at a very real scenario I dealt with in my first year as a land investor.

Back in late-2008, I bought this vacant lot for $4,000:

DSCF4371

I'll be honest with you…  I overpaid for the thing, BIG TIME.

The county assessor had given this property an assessed value of $5,000, which meant that by their standards, the property was worth $10,000 (each state handles assessed values differently – but in my state, assessed values are approximately 50% of a property's supposed market value).

At the time, what I didn't realize was that most county offices are renowned for over-shooting on these property values.

Why? Because when they value properties higher, they can also charge more in property taxes each year. Think about it…   when you have the power to establish values AND handle the taxation on each property, wouldn't you be more inclined to air on the higher side too?

At the time, I figured this assessed value was actually reliable (big mistake), so I offered 40% of this value (which is on the higher side of my equation).

About 4 months later (which seemed like an eternity at the time), I found a buyer who paid me $4,900 for it. Given how much money and time I had sunk into this property, how hard I worked to sell it, and how small my payday was in the end, I wasn't thrilled with the results on this deal. Had I been more patient, I probably could have done better, but I was so paranoid and eager to get it sold that I let my impatience get the best of me.

What I didn’t know at the time, was that I could just as well have donated this property to an eligible non-profit organization and treated it as a tax write-off, which would have effectively given me a lot more “after-tax income” in the end. As long as the tax prep system you use is up to date, it should be set up to account for this.

Donating Land? Seriously??

At first glance, some people may think the idea sounds ridiculous – but it's not all that different from what many of us do all the time with other things we own.

Have you ever donated old clothes, toys, or furniture to a second-hand store? Ever given tithe for a church offering? Perhaps you've felt moved to sponsor a child in need or give canned goods to a homeless shelter? Some people even donate their old cars, boats and equipment and receive tax deductions in return.

What most people don't realize is, you can follow the exact same strategy with real estate and the real kicker is – in some cases, you can come out even further ahead if you give your properties away instead of selling them the conventional way!

As long as you can document the transaction and verify the numbers in sufficient detail – you can donate your properties and receive credit for their FULL market value (regardless of how little you paid for it).

This is a big deal – and when you're able to buy properties for pennies on the dollar, this little-known strategy can go a long way towards reducing your tax bill (or even eliminating it altogether). In the same way you can supercharge your retirement savings tax-free, you can also create some HUGE tax write-offs by selectively donating properties instead of selling them for cash.

How to Donate Real Estate

I had heard about this strategy years ago, but was a little foggy on the specifics of how it works, so I spoke with three different CPAs in my area, along with three licensed real estate appraisers to get the low-down on what procedures need to be followed in order to do this right.

Disclaimer: I'm not a CPA or an appraiser and as such, I'm not qualified to give you any deal-specific tax advice. I know nothing about your financial situation, I'm not familiar with the local laws in your area and I have no idea what kinds of properties you're working with… so before you move forward with the steps outlined below, do us both a favor and cross-check these procedures with a tax pro in your area.

Step 1: Find an eligible non-profit organization that is willing to accept your property.

There are millions of organizations out there that carry “non-profit” status, but only certain types of non-profits can accept contributions that will qualify as a legitimate tax write off for the donor (i.e. – you).

Generally speaking, you'll want to find a 501(c)(3) or a 501(c)(13) non-profit organization. In English, this means you'll want to target one of the following types of organizations:

As you'll see from the massive non-profit directory on Guidestar.org, there is no shortage of eligible non-profits to choose from. You'll probably want to start your search locally, but as long as the recipient non-profit is willing to accept your donation and they're able to give you all the verifying paperwork to document your donation properly, you should be clear to move forward.

2. Verify and Document the Fair Market Value of Your Real Estate

When you donate any non-cash asset to an eligible non-profit, you need to come up with some sort of substantiation for what the item(s) is/are worth. Take this excerpt from Charity Navigator,

When you give used clothes or other items to charity, the Internal Revenue Service will allow you to deduct the fair market value of the items on your income tax return. The IRS isn't in the appraisal business, so it can't tell you exactly how much each item you donate is worth. 

When it comes to valuing real estate, it's going to depend on how much you claim the property is worth.

$5,000 -If you're claiming a tax deduction of $5,000 or greater, this value needs to be substantiated by a professional appraisal. Simply contact a local appraiser and order an appraisal report. This report will outline and explain their professional opinion of the property's market value. When it comes time to file your tax return, this report should be attached to your tax documentation to support your claim of what your tax write off should be for your real estate donation.

Note: In my conversations with three local appraisers in my area (both commercial and residential), the cost of most residential appraisals will be somewhere in the neighborhood of $500 and the cost of most commercial appraisals will start at $1,500 and go up from there (depending on the complexity of their report). Given this – you'll want to factor this additional cost into the overall equation if you're hoping to get credit for a donation of $5,000 or higher (i.e. – sometimes you'll be able to justify the extra cost, sometimes you won't).

On the flip side, if you're claiming a tax deduction of less than $5,000, you can be less “scientific” in nature, and use the same valuation method as your local assessor. As I mentioned earlier – in my home state, property assessors give each parcel a “SEV” (State Equalized Value) of 50% of the property's market value (and from what I've gathered, this number is derived from whatever their gut feeling was at the time). Nevertheless, if you're claiming a value that is LESS than $5,000, you won't need to go much further than this. As long as you have something beyond your own personal opinion to back up your assumption, it should work. Another slightly less-concrete (but potentially useful) way to verify this method would be to simply attach some recent comparable sales from sites like Zillow or Redfin.

3. Retain copies of the closing documentation as evidence of your donation.

In most cases, the documentation doesn't need to be complicated. A simple copy of the Purchase Agreement (confirming that both parties agreed to donate/receive the property for no monetary value), a copy of the Deed (again, listing a transfer value of $0.00) and if it's available, a copy of the Closing Statement (verifying that no funds were received for the transfer of the property).

You could go one step further and fill out a form like this or this (just to be abundantly clear about what's going on), but from my conversations with the CPAs in my area, none of them indicated that this was a necessity.

When Should You Donate Real Estate?

It should go without saying that donating real estate isn't always going to be the answer to your problems. However, it CAN be very beneficial if the numbers make sense.

In order to make the right decision for your situation, you'll have to weigh a few things regarding the deal itself:

  • What is your total investment into the property?
  • What is the high-end value of this property
    • i.e. – What does the county assessor think this property is worth?
  • What is the low-end value of this property
    • i.e. – What kind of low-ball offers are you likely to get when selling?

If the deal seems to make sense on its own merit, you'll also want to look at the bigger picture of your current financial situation:

  • How much money are you on track to make in the current fiscal year?
  • How much will you have to pay in taxes for the current fiscal year?
  • What other tax write-offs do you already have working in your favor for the current fiscal year?
  • How much cash/liquidity do you currently have available
    • i.e. – Are you in desperate need of cash right now, or are you in a good position as-is?

The right answer depends on a number of variables.

If you've got a deal with a healthy profit margin (simply looking at the amount you paid vs. the documented appraised value) AND you're facing a tax liability that is larger than the deduction you'd get from donating the property…  then YES, it probably makes sense to donate it!

If you've got a deal with a weak or questionable profit margin (amount paid vs. value) OR your tax liability is already going to be less than the credit you'd get from donating the property, then NO, it probably doesn't make sense to donate it.

The point to remember is – the decision to donate your real estate shouldn't be driven solely by your inability to get a property sold. I understand it can be frustrating when a property sits on the market for months on end, but if the math still doesn't come out with a better result in the donation scenario, then don't sell yourself short!

As a general rule, I wouldn't recommend buying any property solely with the intent of donating it. Instead, I would look at real estate donations as a “Plan B” that in some situations, may have the potential to turn out even better than your “Plan A” (but even so…  don't pursue anything with the intent of going after Plan B first).

A tax deduction is only useful to the extent that you have a large enough tax obligation to deduct it from… so it should go without saying, this is only a strategy to pursue when your cash position is already healthy enough and when you have a large enough tax burden to hedge it against.

Additional Resources

As I mentioned earlier, I'm not a CPA or tax professional, so before you follow through with this action plan – be sure to get educated about the specifics of how this process works in your area, because these details can change based on a variety of factors, like:

  • The type of property you're donating.
  • Which non-profit you're donating it to.
  • What tax bracket you fall into.
  • The type of documentation you're able to provide.

As Amanda mentioned in the comments section below,

“There are some very specific rules when writing off donations regarding whether you can take fair market value -OR- your actual basis in the donated property, and sometimes the difference is dependent on what type of entity you’re donating to. There may be times, though, when even your basis in the property is worth the write-off. Especially if it’ll *just* squeak you into a lower tax bracket.”

If you're interested in learning more, check out Publication 526 from the IRS website (note: this publication gets updated every year – so be sure you're working with current information) and once you've got a handle on what you're doing, be sure to call your tax professional.

RELATED: Finding The Right Accountant For Your Real Estate Business

You can also check out this site or this site to explore additional information that isn't covered above.

Join the discussion 25 Comments

  • Amanda says:

    Great idea! Like you said, though – make sure to check with a CPA or tax attorney before making any decisions. There are some very specific rules when writing off donations regarding whether you can take fair market value -OR- your actual basis in the donated property, and sometimes the difference is dependent on what type of entity you’re donating to.

    There may be times, though, when even your basis in the property is worth the write-off. Especially if it’ll *just* squeak you into a lower tax bracket.

    As I expect to say quite often – thanks for all the great information and ideas, Seth. I’m so glad I came across your blog!

    • Seth Williams says:

      Thanks for chiming in here Amanda! Do you know where we could find more information about this? It sounds like this would be great supplemental information for people to know if/when they’re pursuing this route.

      Thanks again for stopping by, I’m glad you’re liking the blog!

      • Amanda says:

        The IRS actually has an online tool that will guide you through with questions, but this tool is only for individuals and sole proprietorships.
        If you’re wheeling and dealing in Real Property, I’d hope that you’ve either incorporated or formed an LLC – in which case you will have to wade through IRS language to figure it out. Publication 526 from the IRS has 19 pages of details about deducting your charitable contributions. Go to page 11 to start learning whether you can deduct market value for the property you’re donating or if you’ll be required to use your cost basis.

        And then call your tax professional. Seriously. Charitable contributions is one of the more complex of the tax codes. (And let’s never forget that the IRS changes the rules every single year!) Fer instance [sic] – for corporations, contributions are limited to 10% of taxable income, subject to net operating loss or capital loss carrybacks and dividend deductions and amounts over that 10% can carry forward for up to 5 years. For personal taxes, charitable contributions are limited to 50% of your AGI for most organizations that you donate to, but donations to other organizations may be limited to 30% – unless it’s long term capital gain property, which has a 20% limit.

        You see my point… the rules are crazy complicated and I’ve only just begun to scrape the surface. So please, please, PLEASE – anything beyond the basics like cash tithing at church and the stuff you take to Goodwill, make sure you’ve got your substantiation and then just dump it on your accountant. That is precisely why you pay him or her good money.

  • Justin says:

    Thanks for bringing this to my attention Seth. I had never thought about this strategy. It would make me a bit nervous to claim a really large donation, so I agree that you should get specific guidance for each situation. Keep the great posts coming!

    • Seth Williams says:

      Thanks Justin! And I agree, you’ll definitely want to run the documentation and determination by your tax professional to verify everything is being handled correctly.

  • Rohan Gupta says:

    there are the many things and points, in your article to remember and consider. keep posting like that.

  • Jordan says:

    Great ideas here! Donating real estate you aren’t going to get a good return on is a very good idea. Plus, your land will be going to something good! Thanks for sharing this great hack!

  • Alexander says:

    This is a very interesting article Seth. I recently bought a turnkey property that came with two lots. One lot has my rental on it and is where Im making my profit. The 2nd lot is just a lot right beside it doing nothing. I dont know why a house was never built on it. But from what I can tell, the numbers dont look good for me to build a house on it and make good cash flow. Im already making great cash flow from the original purchase which included both lots. So donating this lot next door is an option for sure. I just need to do more research. Thanks for giving me a different alternative to look at for this lot bro!!

    • Seth Williams says:

      Thanks for your comment Alexander, I’m glad this post gave you some new inspiration.

      Best of luck to you in figuring out if a land donation is the right option!

  • August says:

    hI, do you have a phone number to discus real estate donations? thanks

    • Seth Williams says:

      Hi August – I’m not sure I understand your question. Are you asking for my phone number, or an organization that will accept a real estate donation (or something else entirely)?

  • Roger says:

    Inherited 7 lots in a non vibrant development and contacted a few charities to donate them but they weren’t interested. Appears they want desirable high.valed properties
    Any suggestions as to who might take these lots as I live out of that state and are a burden to me

    • Seth Williams says:

      Hi Roger – you could just keep trying other charities until you find one who will take them (there are a TON of charities out there). How many have you tried so far?

      • Jill H. says:

        As someone in economic development who is working through this idea on the receiving side right now, my suggestion would be to try getting in touch with that area’s economic development organization (some are city-based, others county-based). They might be able to steer you toward a charity or a non-profit community foundation that fits, depending on what type of property – commercial or residential.

  • Gigi says:

    Donating real estate to a charity is a great idea! A dependable charity I would recommend donating to is realestatedonation.org, it’s a funding project created by Giving Center. Giving Center is an IRS verified non-profit organization that depends on the generosity of others to help those in need across the nation. When donating to realestatedonation.org you both receive a tax deduction and help those in need. The staff at Giving Center are always willing to help, and answer any specific questions about making a donation. The process is simple, simply submit the donation form on either http://www.givingcenter.org or http://www.realestatedonation.org and one of their representatives will get back to you, and help walk you through the rest of the process. If you’d like more information you can visit either of their web sites or give them a call at (888)-228-7320

  • Jody Roth says:

    I’m on the Board of a 501(c) 3 and we found some property we are interested in; however, one of the 3 owners thinks the value is more than we can pay. I’m wondering if it’s possible for the seller to receive a tax write-off for the difference in what they sell the property for and what the value of the land is. Do you have any suggestions? Thanks.

    • Seth Williams says:

      Hi Jody – interesting situation (funny how so many sellers think their property is worth more than it actually is). I think if they can get an appraisal to verify that their imagined value is correct, then there might be some potential for this. In the end though, they would probably have to work with their own tax advisor to make sure any loose ends are tied up.

  • Nancy says:

    Before you donate anywhere I’d make sure whoever you’re gonna donate to isn’t a third party and actually has the experience/ability to handle such a huge donation.It can be a little tricky to find somewhere that you can really trust and feel comfortable working with. I’ve found that Real Estate With Causes has a lot of years of experience and they work closely with their donors. They’re pretty transparent with their website too. Just something to check out https://www.realestatewithcauses.org/donate-real-estate.htm

  • Nathan says:

    A tax deduction’s ‘worth’ is based on your tax rate. In the example you gave, even if your combined taxes are 50%, you would need to have the land appraised at $11000, in order to get tax savings of $5500 and to do better than selling for $4900 even after paying $500 to an appraiser.

    • Thanks for sharing your insights Nathan. Understanding the percentages and effective tax savings isn’t always the simplest thing to understand. Talking with an accountant or CPA is always a good idea to help get to the bottom of these numbers.

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