What assets can donors use to make a planned gift?They can use cash, securities (stock, bonds, mutual fund shares) or real estate. They can give tangible personal property (artwork, books, artifacts, equipment, etc.) They can fund a gift plan with a business or partnership interest (closely held stock, a share in a professional corporation, an investment in a limited partnership). They can give you a paid-up life insurance policy.
Donors can also direct a charitable distribution from the balance remaining in their retirement plan (IRA, 401(k), Keough, etc.) at death. They can also make your organization the owner and beneficiary of a new life insurance policy.
Note: Some gift assets can prove challenging for a non-profit to administer and/or liquidate, and your organization should review offers of non-traditional assets carefully before accepting them.
What are the benefits of donating real estate?
- You receive an income tax deduction equal to the appraised fair market value of the property, with no capital gains tax due on the transfer to us.
- You remove a large taxable asset from your estate.
- You can take advantage of a variety of gift formats available for a donation of real estate, each offering unique planning benefits.
How will the value of my gift of real estate be determined?
For all gifts of real estate worth more than $5,000, fair market value will be determined by an independent appraisal that you will obtain.
Can I use real estate to fund a life-income gift?
In many cases, yes! Real estate is most often placed in a charitable remainder unitrust, which will pay income to you, your spouse, and/or other beneficiaries, and provide you with income and capital gains tax benefits.
(For more information on unitrusts, please visit our Gift Plan Details page.)
Can I place real estate or personal property in a unitrust?
In most cases, yes. Remember that an asset like that may not be producing income, and so the unitrust's beneficiaries may receive little or nothing until a sale and re-investment into income-producing assets.
A generous donor wants to fund a Charitable Remainder Unitrust (CRUT) with a piece of mortgaged real estate. What options can I suggest?
A CRUT cannot be funded with mortgaged real estate. The three best options are:
- The donor can pay off the mortgage with other assets and funds the CRUT with the real estate. He could even mortgage some other piece of property and then use some of the income from the CRUT to make the mortgage payments.
- If your charity's gift acceptance policies and your state's regulations allow, the donor can fund a Charitable Gift Annuity (CGA) with the value of the real estate minus the mortgage.
- The donor can give your charity the property through a bequest.
Can a person donate their home to their church through a trust type vehicle and avoid property taxes from the time of the gift until the time of death? If so what is the type of trust that is needed and how can I read up on that type of trust?
- Real estate used to fund a Charitable Trust does not avoid ad valorum taxes (property taxes) whether or not the donor is alive or deceased.
- Personal residences can not be used to fund Charitable Remainder Trusts in case where the donor wishes to remain in their house for the rest of their life. (Not deductible under IRS guidelines for a charitable gift deduction).
- To read about various charitable trust arrangements visit the George Washington University's Planned Giving web site: http://www.gwu.edu/give/waystogive/plannedgifts
Should such a gift be completed and the church owned the property for their use there would be no property taxes assessed.
There might very well be other variations on the theme which would accomplish your goals but would take investigating all of the party's goals. If I can be of any further assistance please let me know.
The "problems" that always puzzled me was "Why churches and other religious institutions resisted receiving Prop 8 property as a gift".
HUD Section 8 housing provides a wonderful opportunity for low income tenants to have a place to live. In most cases these tenants are not of a single denomination and share a wide variety of cultural and working backgrounds. Because of these variables the religious organizations have been reluctant to take ownership and the management obligations that come with a donation of one of these complexes. To restructure the tenant composition to a single religious group it might cause adverse public relation issues. i.e. evicting or limiting the type of tenant which would be acceptable flies in the face of HUD's guidelines.
Section 8 properties are hard to finance and existing mortgages have lock-in provisions that won't allow new owners to refinance or pay off the balance early. So the owner/charity gets locked in on their finance options. If repairs or rental restructuring is required the funds have to come from the charities' capital account. This is always problematical.
Just being in the chain of title raises risk issues not usually acceptable to even religious organization who owns multiple properties for use in their mission.
Does a donor of his home get to use the full basis amount as a deduction in a bargain sale arrangement when the appraisal comes in under the basis?
I've gotten an answer to my question on basis over appraisal issue in a bargain sale donation.
- Basis of property $15,000,000
- Appraised value $13,000,000
- Bargain sale amount $9,000,000
The donor receives a charitable contribution for $4,000,000 and an ordinary loss of $2,000,000. So in my case the donor doesn't miss out realizing all of the tax deductions up to the full face value of his basis.
This tax position works for both residential and investment properties.
Can the appraisal of a building to be donated be based on "Cost To Replace Value"?
Thanks for your inquiry. The answer can be found in IRS Publication 561 which states:
Because each piece of real estate is unique and its valuation is complicated, a detailed appraisal by a professional appraiser is necessary.
The appraiser must be thoroughly trained in the application of appraisal principles and theory. In some instances the opinions of equally qualified appraisers may carry unequal weight, such as when one appraiser has a better knowledge of local conditions.
The appraisal report must contain a complete description of the property, such as street address, legal description, and lot and block number, as well as physical features, condition, and dimensions. The use to which the property is put, zoning and permitted uses, and its potential use for other higher and better uses are also relevant.
In general, there are three main approaches to the valuation of real estate. An appraisal may require the combined use of two or three methods rather than one method only.
1. Comparable Sales
The comparable sales method compares the donated property with several similar properties that have been sold. The selling prices, after adjustments for differences in date of sale, size, condition, and location, would then indicate the estimated FMV of the donated property.
If the comparable sales method is used to determine the value of unimproved real property (land without significant buildings, structures, or any other improvements that add to its value), the appraiser should consider the following factors when comparing the potential comparable property and the donated property:
* Location, size, and zoning or use restrictions,
* Accessibility and road frontage, and available utilities and water rights,
* Riparian rights (right of access to and use of the water by owners of land on the bank of a river) and existing easements, rights-of-way, leases, etc.,
* Soil characteristics, vegetative cover, and status of mineral rights, and
* Other factors affecting value.
For each comparable sale, the appraisal must include the names of the buyer and seller, the deed book and page number, the date of sale and selling price, a property description, the amount and terms of mortgages, property surveys, the assessed value, the tax rate, and the assessor's appraised FMV.
The comparable selling prices must be adjusted to account for differences between the sale property and the donated property. Because differences of opinion may arise between appraisers as to the degree of comparability and the amount of the adjustment considered necessary for comparison purposes, an appraiser should document each item of adjustment.
Only comparable sales having the least adjustments in terms of items and/or total dollar adjustments should be considered as comparable to the donated property.
2. Capitalization of Income
This method capitalizes the net income from the property at a rate that represents a fair return on the particular investment at the particular time, considering the risks involved. The key elements are the determination of the income to be capitalized and the rate of capitalization.
3. Replacement Cost New or Reproduction Cost Minus Observed Depreciation
This method, used alone, usually does not result in a determination of FMV. Instead, it generally tends to set the upper limit of value, particularly in periods of rising costs, because it is reasonable to assume that an informed buyer will not pay more for the real estate than it would cost to reproduce a similar property. Of course, this reasoning does not apply if a similar property cannot be created because of location, unusual construction, or some other reason. Generally, this method serves to support the value determined from other methods. When the replacement cost method is applied to improved realty, the land and improvements are valued separately.
The replacement cost of a building is figured by considering the materials, the quality of workmanship, and the number of square feet or cubic feet in the building. This cost represents the total cost of labor and material, overhead, and profit. After the replacement cost has been figured, consideration must be given to the following factors:
* Physical deterioration-the wear and tear on the building itself,
* Functional obsolescence-usually in older buildings with, for example, inadequate lighting, plumbing, or heating, small rooms, or a poor floor plan, and
* Economic obsolescence-outside forces causing the whole area to become less desirable.
You will need the services of a qualified appraiser to determine if replacement cost method alone will apply, but it seems unlikely that the IRS would consider that appropriate, unless replacement cost is less than the other methods outlined. Always check with your own advisors before making a charitable gift, as we cannot provide legal advice. Good luck with your charitable gift.
Why should our charity look at real estate gifts to fund CRTs, CGAs or Bargain Sales?
- 45% of wealth in USA is in real estate equities, 7% cash, stocks and bonds 40%
- Of the $300 Billion in gifts to charities last year only 2% was in the form of real estate
- Charities reject approximately 80% of all real estate gifts out of hand for fear of risk factors
Generally accepted quote: "Real estate is very risking and difficult to convert into cash for use by the organization."
- Several acceptable disposition methods to avoid risks to the charities: use of options to transfer equities; simultaneous closings to keep the charity out of the chain of title; use of third party facilitating charities or support organizations.
- Consulting services available to manage the process
- Sharing of the gift with charity that does know how to avoid pitfalls and garner the benefits. This may be 65/35 or 50/50 for example.
What are the Donor's opportunities using real estate as an estate planning or tax structure vehicle?
- Help avoid capital gains taxes on the sale of property
- Shelter federal and state income tax burdens
- Light the costs of estate taxes for their heirs
- Relieve themselves from management and liability issues
- Provide a legacy and support several of their favorite charities in a single gift
- Have an opportunity to create a life time income stream greater than the one presently being produced by the real estate
What are the advantages of donating real estate, rather than selling it?
The concept of donating versus selling is most easily explained with an example:
A 69 year old widow owns an office building. She would like to maximize the benefits of the asset for her children, and support her favorite charity, if possible. The table below summarizes her options. After careful consideration, she found the greatest benefit to her children and the charity was to donate the building.
Real Property Liquidation
Sale & subsequent death
Hold & subsequent death
Appraised value $10mil; (example assumes full sale price)
Donor gets credit for full amount of appraised value ($10mil).
Seller's Current Basis
Donor avoids any sales cost, recapture, capital gains taxes, and a portion of his ordinary income tax and eventually estate taxes.
Recapture on Sale
$3mil (tax $900k 30%)
Capital Gains Tax (25%)
Net from Sale
Annual income payment will be arranged at $700k for the rest of donor's life (subject to income tax).
Federal Estate Tax on Net From Sale
$3.9 mil due at death
State Inheritance Tax (7%)
$2.7 mil after tax
Upon death of donor, heirs receive $6mil, tax free from life insurance trust fund.*
Additional notes: In the "Sale" scenario, to generate an income of $700k/year (as in Donation scenario) on the proceeds after selling the property, donor would have to invest long term safely at 11% rate of return.*- Due nine months from death in cash.
**- Less sales cost and discount for cash
Why shouldn't a trust officer at a bank handle a real estate donation?
Banks outsource real estate to designated brokers who may not be totally qualified to handle a particular type of real estate. Furthermore, the designated broker may not be an expert in the area where a piece of real estate is located. In addition, most real estate professionals are not up-to-date on laws and regulations governing charitable contributions.
Experts who specialize in handling such transactions recognize these inherent pitfalls for trust officers. They are dedicated, full-time, to supporting advisors, donors and charities, alike with a network of professionals that have access to updated issues as they relate to donated real estate.
Why shouldn't an estate planning attorney handle a real estate donation?
Attorneys are experts at the law. Just as the bank trust departments outsource their real estate services, estate planning professionals must rely on outside professionals to complete these real estate transactions. Donors should suggest that an expert be brought in as a service provider in the real estate process.
It is the expert's responsibility to manage real estate state transactions so that maximum benefits for both the donor and charity can be achieved. This can be accomplished at no additional cost to the donor. A full-time commitment to real estate as it relates to charitable giving provides experts with the knowledge to structure unique, creative, even unusual transactions that maximize benefits to all parties.
Why shouldn't our usual real estate contact handle a charitable donation?
Most commercial real estate agents have no special training in the intricacies of transactions associated with charitable donations. Planned giving professionals rarely have real estate expertise. This is perhaps why many non-profits are even wary of handling real estate transactions and are missing out on one of this nation's greatest wealth.
Clearly, special qualifications are needed.
How often are the tax laws and regulations that affect charitable donations changed?
The Internal Revenue Tax Codes are updated on an on-going basis. A qualified specialist should constantly monitor IRS changes to capital gains taxes, ordinary income taxes, gift taxes and inheritance taxes so they can provide you, or your company with the most up-to-date advice.
How can donors find worthy charities?
A qualified, outside expert has usually spent years building relationships and a knowledge of numerous charitable organizations. Utilizing their extensive network, they can assist you in identifying a charity that supports causes that are important to you and/or your company.
What types of properties are typically donated by the corporate sector?
Donating non-productive assets to charity can result in significant tax advantages as well as philanthropic benefits. The goal is to maximize the tax benefits of such donations and design sophisticated structures that meet a variety of corporate goals.
Give me some examples of how a qualified expert can help a corporation reach financial and philanthropic goals.
Model 1 -- Employee Benefits
Donor donates nonproductive real estate assets into Charitable Remainder Trusts, which fund corporate personnel packages for executive incentives, severance or retirement. Charity receives corpus of the trust at termination date of trust.
Donor Benefits: Timely property disposal. Tax benefits. Philanthropic funding and alternative funding of employee benefit programs.
Model 2 -- Bargain Sale
Donor sells property through a facilitating charity, a portion of the sale price is returned to the donor and the balance is gifted to one or more charities. Charity receives the partial contribution and either uses or liquidates it.
Donor Benefits: Property disposal with lower capital gains tax. charitable gift deductions for the contribution and enjoys charitable goodwill while fulfilling philanthropic commitments.
Model 3 -- Vacant Land
Donor sells excess land, originally purchased for a building program, through a professional firm such as Real Estate for Charities. Land has greatly appreciated but lays idle. Donation made to favorite, qualified charity as land-lease or gift. Charity either receives right to use (e.g. recreational facility) or revenues from sale.
Donor Benefits: When sold, the current appreciated value of land provides large tax benefits. When leased, the donor receives tax credit for donation and expenses of the lease payment. Enjoys goodwill and creates positive corporate visibility in community.
Model 4 -- Donor Advised Fund
Donor transfers property in which donor retains partial control of the charity's donated distribution. Charity receives an ongoing income stream from fund.Donor Benefits: Retain control and protects asset. Receives tax deduction. Enjoys positive community relations and good will
We have a possible retained life estate gift coming to our nonprofit and we have some questions about the situation. The donor is interested in using a property that may be turned into a bed and breakfast in the future. Do the same tax benefits apply as if it were her primary or secondary residence? Could you provide any guidance on this?
No. This gift will not qualify for a charitable deduction because the donor is retaining control of the asset and using it for business purposes.
The fundamental principle of charitable giving is “you can’t keep your cake and eat it too.” The exception to this rule is split interest gifts, like retained life estates. The donor gives away her home and keeps her right to live in it during her life-time. She gets to enjoy a piece of the cake but she gives up control the rest of the cake. After she makes the gift, the charity decides what happens to the house and if the home becomes an inn.
Sorry, the donor can't keep her cake and eat it too.