“Will the landlord donate leased space to us as a charitable gift?” or “Can’t the landlord lease us space at a below market rate and take the difference as a donation?” I get asked some version of these two questions every week. The short answer is, “No.” None of the nonprofits (and sometimes the landlords) like my answer, and they usually argue with me. However, the experts and the IRS back me up.
David Rosenberg, a Partner at Thompson Knight, focuses his practice on taxation with a special emphasis on nonprofit organizations. When asked about these two examples, he said, “A tax rule known as the “partial interest rule” prevents landlords from claiming a charitable deduction in these circumstances. This rule generally allows a deduction only if the donor contributes the ‘entire interest’ in the property, or an undivided share of the entire interest. Thus, a landlord that owns a building receives a charitable deduction only if the landlord contributes the entire building or an undivided interest in the entire building to a qualified charity.”
The IRS specifically addresses these situations with an example in its Publication 526 regarding Partial Interest in Property. “Example 1. You own a 10-story office building and donate rent-free use of the top floor to a charitable organization. Since you still own the building, you have contributed a partial interest in the property and cannot take a deduction for the contribution.” Read more here.
Bottom line, the only way the owner of the property can get a tax deduction is by donating all or a part of the property ownership to a qualified charity. That charity must have a 501(c)3 designation from the IRS. Figuring out the value of a contribution of a partial interest in property is a whole other can of worms. The IRS addresses that situation in its 561 Publication Partial Interest in Property Not in Trust.
So can a landlord give a charity free space anyway? Sure, they just don’t get a tax deduction.
Some landlords do give charities free space. Frequently it is because the landlord has a personal interest in the charity. In other situations, a landlord might let a charity occupy space if the charity pays the operating costs for the property. I have seen that happen when the landlord doesn’t want the property to be vacant.
Although both these examples can be great for the charities, the downside is that many landlords require the charity to have a 30- or 60-day “kick out” clause in its lease. This clause can place the charity is a difficult position, especially if they have to relocate with minimal notice. The disruption to its operation, time spent seeking new space, and costs of relocating are very important factors when considering this option.
I have also experienced transactions where the landlord gave the charity a cash contribution to reduce the rental rate. The landlord got a tax deduction and recognition for the gift.
No matter the situation, everything has to documented and reviewed by both parties’ legal counsel and tax accountant. Unfortunately even giving or receiving “donated” rental space costs money.
Eliza Solender is president of Solender/Hall Inc., a commercial real estate and consulting firm. Contact her at firstname.lastname@example.org.