1031 Exchange vs a Charitable Gift of Property: Deferral or Deduction

The two paths answer different questions: who keeps the value, and who pays the tax on the gain

An exchange under section 1031 keeps your equity invested and moves your basis into the replacement. The gain is still there, but it can be deferred through further exchanges and is erased at death by the basis reset in section 1014.

A gift moves the property out of your hands. You do not sell, so you do not recognize the gain, and section 170 gives you a deduction. A rental held more than a year is section 1231 property, which section 170(b)(1)(C) treats as a capital asset, so it is capital gain property for the deduction rules.

Neither path suits someone who wants both the deduction and the money. Choose the gift for the share of your wealth you already intend for charity, and the exchange for the rest.

How the deduction is measured, limited and reduced in 2026

Section 170(e)(1)(A) cuts the deduction by any gain that would not have been long-term capital gain on a sale. Publication 526 applies that to depreciation: property used in a business is ordinary income property to the extent of gain that would have been ordinary income because of depreciation. On a rental depreciated straight line, that is usually nothing, so the deduction is close to full value; cost-segregated components reduce it.

The deduction for capital gain property given to a public charity is capped at 30% of your contribution base, which is generally adjusted gross income, with five years of carryover. Gifts to most private foundations are capped at 20% and, under section 170(e)(1)(B)(ii), generally limited to basis.

Two 2025 changes apply for tax years beginning after December 31, 2025: section 170(b)(1)(I) disallows contributions up to 0.5% of your contribution base, and section 68 reduces itemized deductions by 2/37 of the lesser of those deductions or income above the 37% bracket threshold.

Worked model: a $1,000,000 rental given, sold or exchanged

Hypothetical round numbers for a couple filing jointly with about $800,000 of other income, in the top capital gain bracket. The rental is worth $1,000,000, has a $400,000 adjusted basis after $200,000 of straight-line depreciation, and carries no mortgage. Run your own numbers with your CPA.

• Sell: $200,000 of unrecaptured section 1250 gain at 25% is $50,000, $400,000 at 20% is $80,000, and 3.8% net investment income tax on $600,000 is $22,800. Tax $152,800; $847,200 left.
• Exchange: $1,000,000 stays invested, the $152,800 is deferred, and the property stays in the family.
• Give it to a public charity: no gain tax. A $1,000,000 deduction used at 30% of about $800,000 is $240,000 a year, so it is absorbed over the gift year and four of the five carryover years if income holds. At a 35% marginal rate that is roughly $350,000 of tax saved over those years, before the 0.5% floor and the section 68 reduction.
• Sell, then give the cash: $152,800 of tax first, then an $847,200 gift. Giving the property itself delivers $152,800 more to the charity for the same outlay.

A bargain sale or a mortgaged gift splits the property into a sale part and a gift part

Selling the property to a charity for less than it is worth is a bargain sale. Publication 544 requires you to allocate basis between the part sold and the part given in proportion to value, so some gain is taxed even when the price equals your basis.

Hypothetical: the $1,000,000 rental sold to a charity for $400,000. Basis allocated to the sale is $400,000 times 400,000/1,000,000, or $160,000, so the taxable gain is $240,000; the remaining $600,000 is a contribution.

A mortgage makes any gift a bargain sale. Reg. section 1.1011-2(a)(3) treats the debt as an amount realized even if the charity does not assume it, so paying down or refinancing before the gift changes the result.

Paperwork that makes or breaks the deduction: appraisal, Form 8283 and donor-advised fund rules

A deduction over $5,000 needs a qualified appraisal under section 170(f)(11)(C), and above $500,000 the appraisal is attached to the return. Publication 561 requires it to be signed no earlier than 60 days before the contribution and no later than the return due date. Report the gift in Section B of Form 8283, per the Form 8283 instructions.

A donor-advised fund is a fund at a sponsoring organization, defined in section 4966(d)(2). Section 170(f)(18) allows the deduction only with a contemporaneous written acknowledgment that the sponsor has exclusive legal control over the contributed assets. Ask the sponsor whether it accepts real estate before you plan around it.

If you want income for life from the property's value, a charitable remainder trust is the closer comparison to an exchange; selling with a CRT vs a 1031 covers it.

Who each path fits, and the combination many families use

The exchange fits owners who want income, control or an inheritance, especially if they plan to hold until death; 1031 vs holding for step-up shows why. The gift fits owners with high income to absorb the deduction, a settled charitable goal and no heirs who need the property.

Families often do both: exchange most of the value into replacement property, including DST interests that are easier to divide later, and give a separate parcel or a share outright. Keep the two apart: courts have disqualified exchanges where the owner intended, when exchanging, to give the replacement to charity, so a gift should come from property you are not exchanging.