Despite these gains in value, many fund-raisers have relatively limited experience in dealing with gifts of real estate, and some charitable organizations’ gift acceptance policies actually discourage such gifts. Understanding the pros and cons of real estate gifts can help you determine whether a particular gift makes sense for your donors or your charity. This month’s “Planning Matters” column will address a few of the most commonly asked questions about gifts of real estate.
Question: What are the tax implications for gifts of real estate?
Answer: Generally speaking, gifts of appreciated real property held longer than one year will be deductible for income tax purposes at the full face value, up to 30% of the donor’s adjusted gross income. Any excess deduction amount may be carried over for use in up to five additional years. If the property has been subject to accelerated depreciation, the contribution must be reduced by the amount of that depreciation.
Question: Is it necessary to have the real estate appraised before its acceptance?
Answer: If the gifted property is valued at more than $5,000, it is the donor’s responsibility to obtain a qualified appraisal to substantiate the gift. This information is summarized on Side B of Form 8282. If the property is valued at more than $500,000, the full appraisal must be attached to the donor’s appraisal. In some cases, the charity may also wish to obtain its own appraisal.
Question: What about environmental issues?
Answer: Since the passage of the Comprehensive Environmental Response, Compensation and Liability Act of 1980, the potential liability associated with a polluted site has had a chilling effect on gifts of real estate. In the wake of this legislation, some charities even began at this time to discourage gifts of real estate. Exercising due diligence before accepting the gift is the best way to identify potential problems. A title search or abstract may identify troublesome uses of the property. A Phase I or Phase II environmental assessment is commonly used to screen properties before acceptance. In recent years, a number of other strategies have evolved to avoid being listed in the chain of title. For example, a foundation or specialty charity may be used as an intermediary owner prior to sale.
Question: Can real estate be used to fund a life income or split interest gift?
Answer: While real property may be used for these types of gifts, each situation must be considered carefully. A farm or personal residence may be used to establish a qualified “life estate arrangement” where a donor gives property while retaining its use for life, but commercial property cannot be used for that purpose. Until recently, New York state regulations prohibited the acceptance of real estate to fund a charitable gift annuity. Even though this is now permissible, a charity should still consider whether it makes sense to fund gift annuities in this way. In some cases, a deferred gift annuity can provide time to liquidate the property. In the case of charitable remainder trusts, either a net income or “flip” unitrust is usually preferable to an annuity trust.
Question: What about “buyers in the wings” where there is a purchaser waiting?
Answer: Under no circumstances should there be a contract or legal obligation for the sale of appreciated real estate before the gift. In such cases, the tax rules would say that the donor had given the proceeds of the sale and there could be a capital gains liability. It is not unusual, though, to accept marketable real estate where several potentially interested buyers have been identified. If a charitable trust is the recipient of the property, care should be taken to avoid potential self-dealing issues if the potential purchaser is a family member or other affiliated party.
Question: How does the donor complete the gift of real estate?
Answer: If the charity has agreed to accept the property, the legal title should be conveyed by a deed to be filed in the county where the property is located. Care should be taken to make sure that there are no liens, mortgages, or encumbrances prior to accepting gifts of real estate. A warranty deed is preferred over other types of deeds, such as a quit claim deed.
Question: Can a donor give less than his or her entire interest in real estate, such as water rights or an easement?
Answer: Generally, a donor must give his or her entire interest in the property. However, there is a special exception for gifts of conservation easements. A donor can also deed an undivided interest in the entire property to charity. For example, the donor could give an organization a one-quarter or one-third interest in the property and then the charity could sell its interest or wait to receive its share of the proceeds after the entire property is sold.
Gift planners should review their internal gift policies, procedures, and checklists before encouraging gifts of real estate. It would obviously be counterproductive to market such gifts if they are prohibited by your gift acceptance policies.
If you are familiar with your policies, you can then endeavor to identify the appropriate prospect pool to which to market such gifts. Age, wealth, geographic proximity, and giving history are all factors to consider. Donors of certain professions may have a special interest in gifts of real estate. For example, real estate developers may donate an undivided interest in a property before its development, a farmer may leave a bequest of land or give it during lifetime, or a real estate investor might choose to give you an apartment complex or rental property. Persons with multiple residences might want to contribute one of them. It is important, however, that real estate not be considered “business inventory” held for sale as that could adversely impact tax benefits.
In today’s complex fund-raising environment, gift planners must be more open to considering widely owned assets, such as real estate, and encourage interested donors to consider ways to use these assets to fulfill their charitable priorities. With fewer persons subject to federal estate taxes, gifts that provide current income tax deductions and reduce the expenses of taxes, insurance, and upkeep are likely to become more attractive to a growing segment of your donor population.
To learn more about how to promote gifts of real estate, attend one of Sharpe’s popular seminars. See page 3 for more information and upcoming dates.