A home represents many things. To some, a home is an investment and a source of rental income. To others, a home is a retirement asset, one whose equity can be tapped many years down the line. But to others, a home represents something much simpler, an opportunity to live the American dream and escape the dangers of inner city life.
For those aspirational homeowners, owning a property can be truly transformational. Millions of lives have been transformed and improved in just this manner, through organizations like Habitat for Humanity and a host of other, smaller scale charities.
How to Donate Your Home to Charity
For some, donating a home is the ultimate in charitable giving, a single act that can enhance the lives of whole families and create ripples for generations yet unborn. If you are thinking about making such a significant donation, it is important to do it the right way. With such a big gift, making the most of the donation is a vital consideration, and there are many things to think about.
There are a number of considerations when donating property to charity, from legal requirements to appraisals and tax implications. If you decide to donate your home or property to a registered charity, you will want to hire a licensed appraiser to determine its fair market value. This is a critical step for tax reporting, and one that should not be skipped.
You will also want to ensure that the charity is reputable, and that the work they do is worthwhile. Not every charity is the same, and you want to do the greatest good possible with your donation. There are a number of charity ranking organizations that track things like administrative costs, overhead and fundraising expenses, and these services can be excellent reference points.
The simplest way to donate your home is by transferring the deed. Charities that have experience accepting home donations should be familiar with this process, and they should be able to provide you with the paperwork you need to complete the transfer.
It is also important to weigh the pros and cons of a home donation. Depending on what you are trying to accomplish, donating a home may, or may not, be the best approach. Here are some of the pros and cons of a charitable home donation.
- You get to give a significant gift, one that could change the lives of others.
- Depending on the value of the donation, you could receive a substantial tax deduction.
- The charity receives more of the proceeds since charitable institutions are not subject to capital gains taxes.
- You can avoid the home sale process.
- Donating is a simple way to downsize. Couples who purchased their homes decades ago, raised a family and are now retired may choose charitable donation instead of a traditional sale.
- Donating your home during your lifetime could free your heirs from estate taxes when you die.
- You will avoid capital gains taxes on the appreciated real estate. This can be an important consideration, especially for homeowners who have held their property for many decades.
- Donating a home may not be the best way to make a difference. Some charities are better able to handle cash donations and smaller property gifts.
- If you donate to a charity that is not properly registered, your tax deduction could be disallowed.
- Not all charities are the same, and donating to a shady organization, you could negate the value of your donation.
- You will lose out on the value of the property, and that could be a significant loss to your estate.
- You will not be able to tap your home’s equity to supplement your retirement income or deal with an unexpected financial emergency.
How to Donate Your Home to Another Institution or Family Member
Donating to a charity is one thing, but there are other ways to turn your home into a valuable gift to others. There are a number of institutions that accept donations of private homes and property, from colleges and universities to parks and local governments.
You can also choose to donate your home to another family member, giving the recipient a head start on life and freeing them from decades of costly mortgage payments. But before you donate your home to an institution or a family member, it is important to weigh the pros and cons.
If you do choose to donate your home to a family member, that donation is considered a gift by the IRS, and the value of the property will be subject to the gift tax. And while there is a gift tax exclusion in place, its limit is far less than the value of even a modest home.
The good news is that you should not owe any gift tax for making the donation. The bad news is that you will need to file an additional tax form, IRS Form 709, to report the gift, assuming the value of the property exceeds the annual gift tax exclusion.
For the family member receiving the gift, the tax situation is more complicated. The recipient will also be required to complete additional tax paperwork, but they will likely also be subject to the gift tax. This tax could reduce the value of the donation, and in some cases, the family member involved may have difficulty paying the tax.
Speaking with an attorney is a vital preparatory step if you plan to donate your home. Regardless of the recipient, it is important to get legal advice and guidance. Consulting a lawyer can also help you steer clear of legal hurdles that could arise as a result of your generous donation.
Whether you plan to donate your home to an institution or a family member, it is important to draw up the proper paperwork. The documents you prepare should spell out everything from the nature of the donation to the intended use of the property in clear and unambiguous terms. Unless you are an attorney, you should hire a lawyer to draw up and review these documents. You should also make sure everyone involved understands the language and agrees to the terms.
There are pros and cons of donating your home to a family member, and these issues can get pretty thorny. Here are some of the potential benefits and pitfalls of making such a donation.
- You give the chosen family member a significant gift, and hopefully, a head start on a great life.
- The recipient is freed from mortgage payments, and from the high cost of a down payment.
- You avoid the difficult and time-consuming process of selling your home on the open market.
- In most cases, you will not be subject to the gift tax on the donation of your home.
- Donating your home to one family member could create ill feelings among other members of the family.
- Since you are not donating to a registered charity, you will not be able to take a tax deduction.
- There may be tax implications for the recipient of the gift, and your family member could end up with a large tax bill. While there is an annual gift tax exclusion, its limit is probably far less than the value of the home donation.
- You will be forgoing the private sale of the home, and giving up the value of the property.
- You will be required to file an additional tax form to report the donation of your home.
Insurance Information to Know Before Donating Your Home
While there are some exceptions, in the majority of cases, all expenses related to the donation process will be the responsibility of the donor. Those expenses can include things like title insurance and property insurance, as well as any required environmental testing.
In addition to those insurance costs, you will typically be responsible for the cost of ongoing maintenance and upkeep until the property changes hands. Given these ongoing costs, it pays to expedite the donation process as much as possible.
What Happens After You Donate Your Home?
It is important to know what happens after the donation process is complete, and you should be prepared for that moment. The appraisal should have provided you with the fair market value of your donation, and you will want to retain this documentation for tax purposes.
Once the property officially changes hands, you should no longer be responsible for the ongoing costs of maintenance and property upkeep. In addition, the responsibility of property insurance and title insurance will shift to the individual or institution receiving the donation.
Tax Benefits and Implications of Donating Your Home
A home is a significant donation, and it can be quite valuable from a tax perspective. But if you are considering the donation purely for the tax implications, it is important to understand the limitations.
There are limits to how much you can write off in charitable donations, and exceeding those limits could result in a disallowed deduction and an additional tax bill. In most cases, the IRS limits charitable donations to no more than half of your adjusted gross income (AGI), but there are times when the limit is even lower, as little as 20% to 30% of AGI.
It is always important to consult with a tax expert before making such a significant donation. Everyone’s tax situation is different, and the laws governing charitable donations are always changing. By working with an experienced tax attorney or enrolled agent, you can maximize the value of your charitable donation while steering clear of possible pitfalls.
Laws and Paperwork Involved When Donating Your Home
There are specific laws and paperwork requirements surrounding home donations, and it is important to research local and state laws before going forward. Some of these regulations are quite straightforward, while others are far more complicated.
Before you consider any large charitable donation, including the donation of your home, it is important to consult with an attorney, hopefully, an individual with specific experience in this area. Not every attorney will have the expertise necessary to walk you through a home donation, so shop around carefully and choose the best professional for your needs.
Donating your home to charity, or to a family member, can be a great way to transform lives and make a real difference. But before you go forward, you need to plan carefully, so you get the most for your donation, and your intended recipient gets a life-changing gift.