It is often assumed that donations of real estate to private foundations aren’t ideal because charitable deductions for such donations are typically limited to the lesser of the donor’s cost basis and the fair market value. And donations of real estate are often dismissed out of hand regardless of whether the property has depreciated or appreciated in value.
If a property has significantly depreciated in value below its original purchase price, donating it directly to the foundation isn’t recommended because the donor would lose the ability to realize the capital loss. Instead, donors typically are advised to sell the property and then contribute the proceeds. Even a donation of highly appreciated real estate typically is not recommended, as the donor would only be able to claim a cost basis deduction. Yet, despite the impediments that would seem to auger against donating real estate to a private foundation, there are circumstances in which these donations do make sense, both for the foundation and the donor.
Important factors to consider include the donor’s basis in the property, the property’s fair market value, and whether the donation might be a component of an estate plan.
For the foundation, a donation of real estate can be used to generate a steady stream of income and liquid funds. If the property is used for charitable purposes, the foundation may be able to qualify for exemption from property taxes. For the donor, contributing real estate to a foundation might be fiscally savvy as well. When weighing the merits of this kind of gift, important factors to consider include the donor’s basis in the property, the property’s fair market value, and whether the donation might be a component of an estate plan. Some of the possible scenarios where donating real estate to a foundation makes sense include: