14.10 Interests in Real Estate
No deduction is allowed for the rental value of property you allow a charity to use free of charge. This is the case even if the property is used directly in furtherance of the organization’s charitable purpose; see the Example below.
If you donate an undivided fractional part of your entire interest, a deduction will be allowed for the fair market value of the proportionate interest donated.
A donation of an option is not deductible until the year the option to buy the property is exercised.
Caution
Remainder interest in home or farm.
You may claim a charitable deduction for a gift of the remainder value of a residence or farm donated to a charity, even though you reserve the use of the property for yourself and your spouse for a term of years or life. Remainder gifts generally must be made in trust. However, where a residence or farm is donated, the remainder interest must be conveyed outright, not in trust. A remainder interest in a vacation home or in a “hobby” farm is also deductible. There is no requirement that the home be your principal residence or that the farm be profitable.
Caution
Qualified conservation contributions.
A deduction may be claimed for the contribution of certain partial interests in real property to government agencies or publicly supported charities for exclusively conservational purposes. Qualified conservation contributions include: (1) your entire interest in real property other than retained rights to subsurface oil, gas, or other minerals; (2) a remainder interest; or (3) an easement, restrictive covenant, or similar property restriction granted in perpetuity. The contribution must be in perpetuity and further at least one of the following “conservation purposes”—preservation of land areas for the general public’s outdoor recreation, education, or scenic enjoyment; preservation of historically important land areas or structures; or the protection of plant, fish, or wildlife habitats or similar natural ecosystems.
If an easement is donated and the property is subject to a mortgage, the mortgagee’s interest must be subordinated to the charity’s conservation easement at the time it was granted. In one case, the Tax Court agreed with the IRS that a land conservancy’s easement rights on mortgaged property were not protected in perpetuity when the prior owner’s deed of trust was not subordinated to the easement at the time it was granted. A deduction was disallowed although the prior owner signed a subordination agreement two years after the donation. If the donors had defaulted on their promissory note between the time of the donation and the signing of the subordination agreement, the prior owner couyld have brought foreclosure proceedings and eliminated the conservation easement. The Court held that failure to timely meet the subordination requirement could not be excused on the grounds that the likelihood of a default by the donor was so remote as to be negligible.
To obtain the deduction, there must be legally enforceable restrictions that prevent you from using your retained interest in the property in a way contrary to the intended conservation purpose. The donee organization must be prohibited from transferring the contributed interest except to other organizations that will hold the property for exclusively conservational purposes. If you retain an interest in subsurface oil, gas, or minerals, surface mining must generally be specifically prohibited. However, where the mineral rights and surface interests are separately owned, a deduction will be allowed if the probability of surface mining is so remote as to be considered negligible. The exception does not apply if you are related to the owner of the surface interest or if you received the mineral interest (directly or indirectly) from the surface owner.
Law Alert
Contributions valued at over $5,000 must be supported by a written appraisal from a qualified appraiser (14.15)
Historic building façade easements.
A donation of a façade easement with respect to a certified historic structure in a registered historic district, other than one listed in the National Register, is allowed only if the easement preserves the entire exterior, including the space above as well as the front, rear, and sides of the building. The easement must bar exterior changes inconsistent with the historical character of the building. A written agreement between the donor and the donee must certify that the donee is a qualifying historic preservation organization with the resources and commitment to enforce the easement.
The donor must attach to his or her tax return a qualified appraisal of the easement, photographs of the building exterior, and a description of all zoning laws and similar restrictions on development.
If a deduction of over $10,000 is claimed for a façade easement, a $500 fee must be paid or no deduction will be allowed. The fee may be paid electronically or sent to the IRS with Form 8283-V.
Reduction for prior rehabilitation credit. The deduction for a historic building easement must be reduced if a rehabilitation tax credit (31.8) was claimed for the building in the five years preceding the donation.