Giving
property can allow you to make a substantial gift to your favorite cause while
reducing taxes on your estate and possibly giving you a lifetime income stream.
The Community Foundation of Southern Wisconsin has accepted gifts of real
estate for several years. Contact your community foundation advisor for more
information about giving real estate.
With real
estate values skyrocketing amid historically low mortgage rates, many wealthy
donors find themselves with a large percentage of their net worth tied up in
real estate. Financial advisors who are called upon to develop tax planning and
diversification strategies for clients should consider the benefits of real
estate donations. Donors receive an immediate tax deduction and reduce the
value of their taxable estate, while nonprofits benefit from a generous gift.
Increasingly,
donors around the country are calling on their advisors to help them use the
appreciated value of their property to benefit their favorite charities. For
example, residents of Baton Rouge, Louisiana, who drive due north will
encounter a prosperous real estate development with an unlikely owner: the
local community foundation.
Late last
year, a charitably inclined property developer donated 16 acres of raw land
that make up a critical piece of the development, which now includes homes, a
hotel, and commercial buildings. The property donation netted the benefactor a
healthy tax deduction. And when the property is sold, the expected windfall
will enable the donor and his spouse to recommend grants to local organizations
and thus fulfill their charitable goals.
One of the immediate benefits of donating
property is the ability to provide a large gift without disrupting a client’s
investment portfolio or cash position. When wealthy donors gift real estate,
they don’t have to sacrifice liquidity by laying out cash, nor must they give
up potential investment appreciation by selling securities from their
portfolios.
Clients also reap important tax
benefits. Donors who contribute real property to a private foundation generally
can deduct only the cost basis of the property up to 20% of the donor’s
adjusted gross income. However, clients who contribute long-term capital gain
property – real estate they have held more than one year as an investment –
to a public charity, such as a community foundation, can deduct the property’s
fair market value up to 30% of the donor’s adjusted gross income. In both
scenarios, excess deductions may be carried forward and deducted over the next
five years.
An equally important benefit:
unrealized capital gains won’t be taxed if a property is given to charity. In
addition, property that is donated – along with any future appreciation – is
excluded from the client’s taxable estate.
Donating real estate to charity is not
a simple procedure, and advisors must consider a number of important issues.
For example, clients will likely be better off donating real estate to a public
charity, such as community foundation, given the likelihood of a more favorable
income-tax deduction.
In addition, a signed appraisal by a
qualified third party will be required to support the tax deduction. Donors are
generally responsible for getting, and paying for, a fair appraisal. “If a
charity sells the real estate within two years, which usually will be the case,
Form 8282 will be filed with the IRS. If there is a significant discrepancy
between the sale price on this ‘tattle-tale’ form and the valuation claimed for
tax purposes, the IRS may question the deduction,” says Gid Smith, president of
The Community Foundation of Greater Memphis, which has been handling charitable
property transactions through its real estate division since the early 1990s.
Further complications arise if clients
donate mortgaged property. “The transaction will be treated as a bargain sale
if the property is encumbered,” says Harvey Berger, national director of Not‑for‑Profit
Tax Services at Grant Thornton LLP.
“Under the bargain sale rules, a contribution of such property is
treated as part-sale and part-gift, reducing the tax deduction.”
Donating real estate for which the
donor has claimed depreciation deductions on prior tax returns also raises
important tax considerations. “You have to reduce the contribution by any
amount that would be taxed as ordinary income on a sale,” says Berger. “This
includes depreciation recapture. While you technically don't pay tax on the
recapture, reducing the contribution amounts to the same result.”
By using sophisticated giving
strategies, clients can remain more involved with donations, retain the right
to use a residential property that has been gifted, or even receive lifetime
income, in addition to the benefits mentioned above.
Smart planned giving techniques
include:
Donor
Advised Funds. A client might gift real estate to a donor advised fund at
a community foundation and receive an immediate tax deduction. After the
property is sold, the proceeds are held in the donor advised fund. The donor
can then suggests specific charitable gifts, which may be spread over a period
of years, to local organizations from this fund. This strategy gives clients
ongoing participation in philanthropic efforts.
Retained
Life Estates. Some clients would like to give their homes or farms to
charity, while continuing to live in or use the property. If such rights are
preserved, the client’s upfront tax deduction will be reduced to a percentage
of the property’s value; the longer the charity is expected to wait, the
smaller the immediate tax benefit. In addition, a donor who retains a life
estate also retains the responsibility to maintain the property and pay necessary
expenses.
Charitable
Remainder Trusts. Another strategy is to donate real estate to a trust that
will sell the property and pay the donor (or perhaps a donor and spouse) a
lifetime income stream. That income might be a fixed amount or a fixed percentage
of trust assets. Eventually, assets left in the trust will be donated to
charity. This is usually an option only
if the property to be donated is free from debt.
Although
there are minimum charitable requirements, it is possible for clients to retain
a relatively large income stream and receive a relatively small (as little as
10 percent) upfront tax deduction. Conversely, clients with substantial
charitable intent can specify a smaller income stream and receive a larger tax
deduction. Charitable remainder trusts must be created and administered
carefully so many charities, including community foundations, will need to work
closely with donors' advisors to see that the proper steps are taken.
If executed carefully as part of a
comprehensive estate plan, gifts of real estate offer many benefits to clients
and their favorite charities. Advisors who understand the intricacies of real
estate donations will be in a better position to help their clients achieve
their giving goals in a way that’s consistent with their overall financial
plan.
Copyright
2004, Council on Foundations and Community Foundations of America
Used with
permission