As commercial property owners, we are often called by charities asking that we donate leased space in return for a charitable tax deduction. While many charities believe that a landlord will receive a tax deduction for a donation under these circumstances, they are incorrect.
Generally, Congress enacts tax laws that encourage donations to charity. Section 170(a)(1) of the US code provides:
There shall be allowed as a deduction any charitable contribution (as defined in subsection (c)) payment of which is made within the taxable year. A charitable contribution shall be allowable as a deduction only if verified under regulations prescribed by the Secretary.
The IRS imposes a number of limitations on this section. For example, the value of personal services contributed to a qualified charity is not deductible (Rev. Rul. 162, 1953-2 C.B. 127). In addition, the IRS has determined that rent free use of real or personal property does not represent a “payment” under IRC 170(a)(1)(Rev. Rul. 70-477, 1970-2 C.B. 62).
When a property owner transfers title to a charity of all or part of real property, the owner can generally take a tax deduction for the gift. However, offering a charity leased space for free or at a reduced rate is a not a gift of an ownership interest and is not considered deductible by the IRS.
Landlords can accept rent from a charity and then make a gift back to the charity in an amount equal to the rent. This provides great economic benefit to the charity but does not reduce the taxable income of the landlord. The rent paid by the charity must be included in the landlord’s income and thereby offsets any benefit of the charitable deduction that may be allowed to the landlord.
Landlords do a good deed by donating leased space to a charity but they are not permitted to receive a tax benefit for their action.