Washington News

On May 21, 2026, the Internal Revenue Service (IRS) published Tax Tip 2026-42 and reminded taxpayers to review the potential tax benefits available for homeownership. While owning a home can be expensive, certain deductions and credits may help offset some of the costs associated with purchasing and maintaining a residence.

Taxpayers who itemize deductions may generally deduct state and local real estate taxes subject to applicable limits, and qualified home mortgage interest. However, only certain expenses qualify for a federal income tax deduction.

The Service emphasized that many common homeownership expenses are not deductible. These non-deductible expenses generally include homeowners’ insurance, utilities, most settlement and closing costs, homeowners’ association fees, repairs and amounts applied toward the principal balance of a mortgage loan.

The IRS also highlighted the Mortgage Interest Credit, which is designed to assist lower-income taxpayers with homeownership costs. Taxpayers who received a qualified Mortgage Credit Certificate from a state or local government agency may be eligible to claim a credit for a portion of the mortgage interest paid each year on their primary residence.

In addition, the IRS noted that ministers and eligible military members who receive a nontaxable housing allowance may still deduct qualified real estate taxes and mortgage interest. The deductions are not reduced by the amount of the housing allowance they received.

The IRS encouraged homeowners to review Publication 530, Tax Information for Homeowners, and Publication 936, Home Mortgage Interest Deduction, to better understand the available tax rules and substantiation requirements applicable to homeownership deductions and credits.

Deduction Disallowed due Strict Substantiation

In Clint L. Martin v. Commissioner; No. 9425-22; T.C. Memo. 2026-40, the United States Tax Court considered whether taxpayers Clint L. Martin and Jenifer Martin were entitled to a charitable contribution deduction for the donation of real property. The controversy focused primarily on the strict substantiation requirements for charitable contributions of real estate under Internal Revenue Code Section 170.

Clint Martin and his cousin, Stephen Martin, jointly owned approximately 13 acres of land located in Utah. In 2018, the owners offered to donate the property to Highland City for public use. The city ultimately accepted the donation, and the taxpayers claimed a charitable contribution deduction on their federal income tax return based on the appraised value of the property.

The IRS disallowed the deduction, arguing the taxpayers failed to satisfy the contemporaneous written acknowledgment (CWA) requirements under Section 170(f)(8)(B)(ii). The IRS contended that the CWA did not include a statement that no consideration was provided for the donation. The acknowledgment that the taxpayers received from the city contained a statement indicating that Highland City provided $10 “and no other good and valuable consideration.”

The Tax Court agreed with the IRS and held that the deduction must be denied because the substantiation rules for charitable contributions are strictly construed. Although the taxpayers substantially complied with many documentation requirements and there was no dispute that the property was in fact donated, the court determined the missing CWA language of “no goods or services” was fatal to the deduction.

The Court rejected arguments that the omission was merely technical or harmless. The Tax Court emphasized that Congress established clear statutory substantiation requirements and taxpayers must strictly comply to receive a charitable deduction.

Editor's Note: The Martin decision highlights the continuing importance of strict compliance with charitable substantiation rules. Even if a charitable transfer is undisputed, the failure to obtain a properly drafted CWA may result in the complete loss of the charitable deduction. Donors and advisors should carefully review their documentation to ensure all statutory requirements are satisfied before filing a return claiming the deduction.

Bill Introduced to Modernize Digital Asset Rules

The bipartisan Digital Asset Protection, Accountability, Regulation, Innovation, Taxation, and Yields (PARITY) Act was recently introduced and would significantly revise the federal income tax treatment of digital assets if enacted.

One of the most notable aspects of the proposed legislation is the effort to align digital asset taxation with many of the long-standing principles already applicable to securities and commodities. The draft legislation includes provisions addressing wash sale rules, constructive sale rules, securities lending concepts and mark-to-market elections for certain digital asset traders and dealers. The proposal also attempts to provide greater clarity regarding staking, mining and stablecoin transactions.

From a charitable planning perspective, the PARITY Act is significant because it intends to modernize the charitable contribution rules applicable to digital assets. While publicly traded securities currently enjoy favorable substantiation and deduction rules under the Internal Revenue Code, actively traded digital assets are excluded from this treatment.

Under current law, a donor who makes a charitable contribution of a long-term held digital asset that exceeds $5,000, must obtain a qualified appraisal. In addition to the qualified appraisal, the donor must complete Section B of IRS Form 8283. The qualified appraisal requirement applies to actively traded digital assets.

If enacted, the PARITY Act would make charitable gifts of cryptocurrency more attractive for donors. The PARITY Act would align digital assets with gifts of appreciated stock. The proposal would eliminate the current requirement to obtain a qualified appraisal for charitable gifts of actively traded digital assets exceeding $5,000. Instead, donors could rely on readily available market quotations from established digital asset exchanges for value, substantially reducing administrative costs and compliance burdens.

The PARITY Act remains a draft proposal and none of its provisions are currently effective. Existing IRS guidance governing digital assets continues to apply unless and until Congress enacts new legislation. Donors contributing cryptocurrency today must still comply with current appraisal, substantiation and reporting requirements, including qualified appraisal rules for digital assets.

Applicable Federal Rate of 5.0% for June: Rev. Rul. 2026-11; 2026-24 IRB 1 (15 May 2026)

The IRS has announced the Applicable Federal Rate (AFR) for June of 2026. The AFR under Sec. 7520 for the month of June is 5.0%. The rates for May of 5.0% or April of 4.6% also may be used. The highest AFR is beneficial for charitable deductions of remainder interests. The lowest AFR is best for lead trusts and life estate reserved agreements. With a gift annuity, if the annuitant desires greater tax-free payments the lowest AFR is preferable. During 2026, pooled income funds in existence less than three tax years must use a 4.0% deemed rate of return. Charitable gift receipts should state, “No goods or services were provided in exchange for this gift and the nonprofit has exclusive legal control over the gift property.”