This article is the first of a two-part series on substantiating noncash gifts. Part two focuses on the special rules related to donations of noncash “personal property”—such as clothing, cars, boats, household items, and stock.
Q: What are the tax rules for gifts of real property, and how can churches guide donors to ensure compliance and proper documentation?
The tax rules for gifts of real property can be complex, but compliance is critical for both donors and charitable organizations. A notable case highlights the importance of following these rules. A U.S. Tax Court judge disallowed an $18.5 million deduction for donated real estate because the donors failed to obtain required appraisals and documentation. This case underscores that good intentions do not override tax law.
Understanding the Tax Rules for Gifts of Real Property
For donors and churches alike, ensuring compliance with IRS regulations involves understanding substantiation requirements. IRS rules dictate the documentation and forms needed for different types and values of noncash donations of real property.
Key Compliance Requirements
- Donations above $500: Require donors to complete and submit Section A of Form 8283 to the IRS.
- Donations above $5,000: Require donors to complete and submit Section B of Form 8283, including a signature from an authorized representative from the church, and a qualified appraisal paid for by the donor to the IRS.
How Churches Can Support Donors
Churches play an essential role in helping donors navigate these rules. According to Frank Sommerville, CPA and senior editorial advisor for Church Law & Tax, it is crucial to get documentation right the first time. Churches can assist by:
- Providing clear, accurate written acknowledgment letters that state no goods or services, other than intangible religious benefits, were provided in exchange for the donation (or else noting their value if they were);
- Educating donors about IRS requirements;
- Encouraging donors to consult tax professionals.
Examples of Compliance Scenarios
Example 1: Land Donation Under $5,000
A parishioner donates an acre of farmland worth $3,000. The donor must complete and submit Section A of Form 8283 to the IRS, and the church must provide the donor a written acknowledgment. An appraisal is not required.
Example 2: Residential Property Donation
A donor gives a residential property valued at $25,000. This requires a qualified appraisal paid for by the donor. The donor also must complete and submit Section B of Form 8283, including a signature from an authorized church representative, to the IRS. The church must provide the donor a written acknowledgment as well.
Example 3: Underestimated Value to Avoid Appraisal
A donor gives property with a fair market value of $6,000 but claims a deduction of only $4,000 to avoid the appraisal requirement. This is allowed, as the deduction amount dictates IRS requirements. The church must provide a written acknowledgment to the donor.
When Churches Must File Form 8282
Churches must file Form 8282 if they sell, exchange, or dispose of donated property within three years of receipt, unless the property is used for charitable purposes or valued at less than $500. The form must be submitted within 125 days of disposal.
Best Practices for Churches
- Train staff to understand IRS requirements and assist donors effectively.
- Provide acknowledgment letters promptly and accurately.
- Encourage donors to seek guidance from qualified tax professionals.
- Maintain clear records of donations and associated forms.
Frequently Asked Questions
What qualifies as real property for donations?
Real property includes real estate that can be donated to a charitable organization.
What documentation is required for gifts exceeding $500 or $5,000?
The church must provide a written acknowledgment for the donor.
For gifts exceeding $500, donors must complete Section A of Form 8283 and submit it to the IRS.
For gifts over $5,000, donors must obtain a qualified appraisal and complete Section B of Form 8283, which requires a signature from an authorized church representative of the church.
In both instances, the church should provide the donor with a written acknowledgement.
When must a church file Form 8282?
If a church disposes of donated property worth more than $500 within three years, it must file Form 8282 with the IRS, unless the property is used for charitable purposes or valued at less than $500.
What is the donor’s responsibility for compliance?
Donors are responsible for obtaining appraisals, completing required forms, and maintaining documentation for all deductions.
For more details, refer to IRS Publication 526 and IRS Publication 561.
