An Important Tax Court Case About Giving Real Estate

The Guest case shows how to reap benefits from and avoid problems with a real estate gift.

The donor in Guest wrote a letter to Charity stating that he, by the letter, gave two properties to Charity. Wanting the gift but not wanting to be in the chain of title, Charity wrote back to the donor that it accepted the gift and asked that the donor await Charity’s transfer instructions.

Next, Charity approached a real estate investment group (the “K Group”). Charity and the K Group made a deal. Charity would instruct the donor to deed the two properties to the K Group who would sell the properties and remit the sale proceeds to Charity.

In fact, that’s what happened. The matter wound up in the tax court, which considered two basic questions: Had the donor made a charitable gift? If so, when did the donor make the gift?

The court held that [1] the donor did make a charitable gift and [2] the donor made the gift when he deeded the two properties to the K Group.

To understand this holding, one must grasp that the federal tax law doesn’t always follow state law. Under state law, the donor never transferred the properties to Charity … Charity never received a deed from the donor. Under federal tax law, however, the gift was formed by the exchange of letters and the donor’s transfer to the K Group pursuant to Charity’s instructions.

So, the donor got a charitable deduction, and Charity was never in the chain of title. A terrific outcome.

Caution: Don’t try this “at home.” A Guest transaction requires expert handling by a skilled tax lawyer.

By Jon Tidd

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