Donated rental property to a noncharitable organization based on IRS

[lefty04]

I “donated” a rental property to the city in which the property was located. The city is not considered a charitable organization based on IRS website. How do I remove from my tax return? Would this just be considered a 1231 capital loss? There was no income or expenses for the year. The only thing left to remove is the remaining depreciable life of the house. 

[Opus 17]

Donated "use of" or gave the title in fee simple?  Branches of the US government and its subdivisions (states, cities, etc.) are automatically allowed to receive tax-deductible donations even though they are not listed in the SelectCheck database.

[lefty04]

We transferred all ownership. The deed was recorded at the court house into the City’s name

[SweetieJean]

"I" "we"  Who exactly are "we?"  You and your spouse?

[lefty04]

Yes, my spouse and I

[Opus 17 · Accepted solution]

See IRS publication 526.   https://www.irs.gov/pub/irs-pdf/p526.pdf

A city government is a qualified organization (page 2).

For property used in business, the value of the deduction is generally limited to your current cost basis (cost plus improvements minus depreciation), or the fair market value, whichever is lower (page 11).

You will need to follow the documentation rules as well.  For a non-cash donation valued at more than $5000, you need a signed appraisal, the signature of the appraiser on form 8283, and a signature of an authorized financial agent of the recipient organization (city conservation department or wherever else you donated it).  You will need to send the original signed form to the IRS with your tax return.  (Keep a copy for your records.)  Page 17-20.  

You will also want to keep your purchase, improvement and depreciation records showing your adjusted cost basis, for at least 7 years from when you file the tax return.

[TaxGuyBill]

I suspect he can deduct the Fair Market Value.
<a rel="nofollow" target="_blank" href="https://www.irs.gov/publications/p526#en_US_2016_publink1000229761">https://www.irs.gov/publications...>

[Opus 17]

Income property.  

Property used in a trade or business. Property used in a trade or business is considered ordinary income property to the extent of any gain that would have been treated as ordinary income because of depreciation had the property been sold at its fair market value at the time of contribution. See chapter 3 of Pub. 544, Sales and Other Dispositions of Assets, for the kinds of property to which this rule applies.

Amount of deduction. The amount you can deduct for a contribution of ordinary income property is its fair market value minus the amount that would be ordinary income or short-term capital gain if you sold the property for its fair market value. Generally, this rule limits the deduction to your basis in the property.

[TaxGuyBill]

"to the extent of any gain that would have been treated as ordinary income because of depreciation"

I interpret that to mean he can deduct the FMV minus the depreciation.

So if the Unadjusted Basis was $100,000, he took $10,000 of depreciation, and the FMV is $150,000, I think he can deduct $140,000.

Do you agree?

[TaxGuyBill]

Actually, I take that back.  Your citation says "would have been treated as ordinary income".  Although the depreciation of a rental property has the same tax rate as ordinary income (up to 25%), it is still Capital Gain.

[Opus 17]

So start with this:

Property is ordinary income property if you would have recognized ordinary income or short­term capital gain had you sold it at fair market value on the date it was contributed...The amount you can deduct for a contribution of ordinary income property is its fair market value minus the amount that would be ordinary income or short­term capital gain if you sold the property for its fair market value. Generally, this rule lim­ its the deduction to your basis in the property.

So for, let's say, a self-created painting, with $100 cost of materials and $10,000 FMV, the artist can only claim a donation of $100 because the other $9,900 would have been ordinary income.

Now, the rule for income property says that even though income property may be capital property, sometimes it must be treated under the rules for ordinary income property.  To wit:

Property used in a trade or business is consid­ ered ordinary income property to the extent of any gain that would have been treated as ordi­ nary income because of depreciation had the property been sold at its fair market value at the time of contribution. See chapter 3 of Pub. 544, Sales and Other Dispositions of Assets, for the kinds of property to which this rule applies.

The funny thing here is that pub 544 describes the recapture on section 1231 property as "ordinary income".  (Which I don't understand why it is not a straight 25%, see page 28-29 of pub 544.)

And going back to pub 526, it says "Don't reduce your charitable contribution if you include the ordinary or capital gain income in your gross income in the same year as the contribution. See Ordinary or capital gain income included in gross income under Capital Gain Property, later, if you need more information."

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So I take that to mean that the value of the donation is not cost basis (I was wrong about that), but FMV minus depreciation. If the property has lost value, the donation value would be FMV minus whatever part of depreciation would normally have to be recaptured.

Or, the taxpayer can claim a donation for the full FMV if they also report the recapture as income.  (This might be sensible if the taxpayer's marginal rate is 28% or 33% since the recapture is at 25%.)

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So I think your first answer was right @TaxGuyBill, the donation value is FMV minus deprecation.  For non-income real property held more than one year, the taxpayer can deduct FMV, not cost, so for income property, the donation only has to be reduced by the recapture that is due.
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Clearly though, if a couple of pretty smart amateurs like us aren't sure, the taxpayer may want to ask a real accountant!

[TaxGuyBill]

But again, it is "to the extent of any gain that would have been treated as ordi­nary income because of depreciation"

The tax on the depreciation for Real Estate (§1250) is NOT Ordinary Income.  It is a Capital Gain.

However, you make an interesting point about Net Unrecaptured §1231 Gain.  If he claimed §1231 losses during the last 5 years (with no offsetting gains), that would change that part of the NON-depreciation gain to "ordinary income".

This would also potentially limit his deduction due to the 30% limit:
<a rel="nofollow" target="_blank" href="https://www.irs.gov/publications/p526#en_US_2016_publink1000229810">https://www.irs.gov/publications...>


Interesting, I never realized that contributing property to a charitable organization could be so complex.  I've never had to deal with that before.