How Donating a Rental Property to Charity Can Provide Significant Tax Benefits: A Case Study

Key Points

• Donating appreciated real estate, such as rental property, to a donor advised fund (DAF) or public charity can result in a charitable deduction equal to the fair market value (FMV) and eliminate capital gains tax.

• The taxpayer avoids depreciation recapture, which would otherwise be taxed at up to 25%.

• Charitable deductions for appreciated property are limited to 30% of adjusted gross income (AGI), with a five-year carryforward for any excess.

• New rules from the OBBBA, effective after 2025, impose a 0.5% AGI floor on charitable contributions.

• A qualified appraisal and IRS Form 8283 are required for gifts of real estate over $5,000.

• Gifting property directly, rather than selling and donating cash, can produce greater tax benefits.

• Donating appreciated assets can support philanthropic goals while also reducing the size of a taxable estate.

Case Study: Contribution of a Rental Property

In 2011, a taxpayer purchased a rental property for $100,000 ($18,000 allocated to land and $82,000 to the building). Over the years, the building was depreciated by $39,500 using the straight-line method. In 2024, the property’s fair market value (FMV) had appreciated to $450,000. The taxpayer decided to contribute the property, in full, to his DAF.

Why Charitable Contributions of Real Estate Matter

• Donating appreciated real estate allows the taxpayer to claim a charitable deduction for the property’s FMV, rather than just the original cost or adjusted basis.
• Avoidance of depreciation recapture: $39,500 would have been taxed at a maximum rate of 25%.
• The donor avoids paying capital gains tax on the property’s appreciation.
• The deduction can offset up to 30% of the donor’s adjusted gross income (AGI) in the year of the gift, with a five-year carryforward for any excess. Effective for tax years after 2025, the OBBBA added a 0.5% AGI floor on charitable contributions.

Key Requirements for Noncash Charitable Contributions

• The property must be held for more than one year to qualify as long-term capital gain property.
• If the property is encumbered with a mortgage, the amount of the contribution is reduced by the outstanding mortgage.
• A qualified appraisal is required for gifts of real estate valued over $5,000.
• The deduction is generally limited to 30% of AGI for gifts of appreciated property to a public charity. The donor may elect to deduct only the property’s basis, increasing the AGI limit to 50%. Note the OBBBA change impacts 2026 and beyond.
• Form 8283 must be attached to the tax return for noncash contributions over $500.

Strategy and Outcome

1. Determine Adjusted Basis and Depreciation

• Original cost: $100,000 ($18,000 land, $82,000 building)
• Depreciation taken: $39,500 (straight-line)
• Adjusted basis: $100,000 – $39,500 = $60,500

2. Calculate Charitable Deduction

• Charitable deduction: $450,000 (FMV)
• Since only straight-line depreciation was taken, there is no depreciation recapture to reduce the deduction. A word of caution since cost segregation studies and bonus depreciation on properties has become very popular: The gain recaptured as ordinary income (to the extent of the depreciation deductions previously taken over the depreciation allowable under the straight-line method) reduces the amount of the charitable deduction for the contribution property otherwise based on FMV.
• Note that your Qualified Business Income (QBI) can be impacted negatively by Schedule A (itemized deductions), so work with your tax advisor to analyze the impact.

3. Apply Contribution Limits

• The deduction is limited to 30% of AGI for appreciated property to a public charity/DAF. Effective for tax years after 2025, the OBBBA added a 0.5% AGI floor on charitable contributions.
• Excess deduction can be carried forward for up to five years.

In the table below, assume the investor wanted to give as much to charity as possible. The first investor collected the cash from the sale and gave cash to his DAF. The second investor gave the property to his DAF directly and we are assuming a 2025 contribution since 2026 will look different because the first 0.5% of a taxpayer’s AGI will not be tax deductible.

Table 1

Lessons for Real Estate Investors 

• Contributing appreciated property allows investors to bypass both capital gains tax and straight-line depreciation recapture.
• A deduction equal to the property’s FMV provides significant tax reduction potential, not just the original cost or adjusted basis. It also is a great way to save on cash while still being generous and meeting your philanthropic goals.
• The deduction is subject to the 30% AGI limit, with a five-year carryforward for any unused amount. Effective for tax years after 2025, the OBBBA added a 0.5% AGI floor on charitable contributions.
• Gifting real estate during life can also reduce the size of a taxable estate.
• Proper documentation, including a qualified appraisal and Form 8283, is essential for substantiating the deduction.

How Trout CPA Can Help

At Trout CPA, we help investors evaluate whether donating appreciated property is the most tax-efficient strategy. Our team can help you evaluate the tax impact of charitable contributions, ensure compliance with IRS requirements, and develop a strategy that maximizes your tax benefits. If you are considering donating real estate or other appreciated assets, contact us to discuss your options and optimize your charitable giving.

About the Authors

Randall joined Trout CPA in 2011. He graduated from Millersville University with a Bachelor of Science degree in Business Administration (magna cum laude) in 2006. Randall has over 19 years of accounting experience. He currently serves on the firm's Construction and Real Estate, Manufacturing, and Estate & Trust Practice Groups. As a Partner, Randall manages all aspects of tax planning and preparation and business consulting for some of the firm's significant clients. Randall enjoys activities with his family, being involved with his church, and rooting for Philadelphia sports teams. He lives in Lancaster County with his wife and two children.

Dustin Peck, CPA

Dustin joined Trout CPA in 2018 after graduating from Messiah College (summa cum laude) with a Bachelor of Science degree in Accounting with a minor in Economics. Dustin serves on the firm’s Construction & Real Estate and Consumer Services Industry Groups. He also serves on the firm’s Multistate Taxation Industry Group. In his free time, Dustin enjoys spending time with his family and friends and participating in outdoor activities such as hiking, biking, and hunting. He lives in Lancaster County with his wife.