The article “What Are The Tax Implications Of Donating Land?” was originally published on MoneySense on August 20, 2019.
Donating, rather than selling, could be a way to put money back in your pocket in the form of a tax refund, while benefitting a charity and the environment.
Q. I have some land in Nova Scotia that I don’t plan to use. It’s a small, empty lot valued at about $15,000. I was wondering if I could donate that land to a wildlife charity and receive a tax break for it rather than selling it off? What would the tax break be in my specific case? I’ve never donated to charity before and earn about $55,000 annually.
A. I would start by speaking to the charity in question, Raymond, as there may be different options available for the land beyond just a direct donation. For instance, you may be able to sign a conservation agreement where you are paid by an organization to limit land uses and protect species and features. This way, you retain ownership and can sell the land in the future or pass it to your beneficiaries on your death. There are many other potential landowner options a charity may be able to help you explore as well.
However, if you choose to donate the land outright to the charity, the donation will be calculated based upon the fair market value of the land at the time of donation.
Despite this being your first charitable donation, Raymond, unfortunately there is no special tax benefit for you to take advantage of. You may be recalling the temporary First-Time Donor’s Super Tax Credit, which was introduced in 2013, offering an extra tax credit of up to 25% of the value of the donation; however, that credit ended in 2017.
Keep in mind there are capital gains tax implications any time you sell, gift or donate land. Land cannot qualify as a tax-free principal residence unless there is a home on it, so any disposition of land will generally lead to a capital gain or capital loss. In some cases, it could be taxable as business income or inventory, but this wouldn’t generally be a concern for someone who has owned land for some time in a personal-use capacity.
If the fair market value at the time of your donation exceeds the adjusted cost base (which is made up of the purchase price + acquisition costs + improvements) when you acquired the land, you will have a capital gain to report on your tax return. When you donate certain types of property to a charity, including certified ecologically sensitive land, you may be entitled to an inclusion rate of zero (meaning none of the capital gain is taxable) on any capital gain realized on such gifts.
You are normally limited to claiming charitable donations up to 75% of your net income for a given year, but gifts of ecologically sensitive land are not subject to any limit. That said, given your $55,000 annual income, you may want to consider claiming the gift over more than one year, depending on your other tax deductions and credits for the year, to make the most of it. You can carry forward the credits associated with a gift of ecologically sensitive land for up to 10 years.
Donating eligible land to a charity can help you avoid capital gains tax, as well as qualify for a charitable donation tax credit. If it is land that you’re not using anyway, a donation could be a way to put money back in your pocket in the form of a tax refund, while benefitting a charity and the environment.
Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto. He does not sell any financial products whatsoever.