Charitable Giving: Gifts of Real Estate
by Chase V. Magnuson, CCIM
President – Real Estate for Charities
Within the last few years, the Federal government has announced a reduction in support to public charities of approximately $250 billion. Charities, faced with replacing these funds or curtailing their operations, have had to explore new areas of fund raising. It is becoming readily apparent that appreciated real estate may hold the key to their cash crunch. There will continue to be the gifts of stocks and cash, but these aren’t as attractive to donors as they were a few years ago. At that time, the United States capital base had stocks valued at approximately $12 trillion and real estate at $24 trillion* (The Wall Street Journal, Oct. 13, 1999, p.2). These numbers may have changed slightly in the last couple of years, but real estate values haven’t been faced with the same percentage of devaluation as stocks. Raw land is just one segment of the real estate markets in which capital is concentrated. According to the information available from the U.S. Department of Commerce, there are over 945 million acres of farmland, forestlands and rangeland in the United States with a total market value of over $687 billion. Of the 1,925,300 farm operators, 1,125,295 or 58 percent are age 50 or older. A full 15 percent are age 70 and older. An active area of planned giving is where donors can gift their property in return for a lifetime income payment, i.e., a charitable gift annuity. Holding a donated asset that offers no foreseeable promise of appreciation or sale is most often not in the charity’s best interest to accept. The charity either needs to be able to sell the property to generate cash to support the gift annuity or be able to use the property for the organization’s present or future needs. An example may be a small tract of land that can complement a school or church facility and be used for future expansion, a baseball field or dormitories. In cases where the donation is the primary residence there are some new creative approaches being used by organizations such as Sharp Health Care Foundation of San Diego and some other charities. Here is an example of the concept:A married couple own a home valued at $800,000 with a $200,000 mortgage. They would like to make a donation of the property and retain a life estate (live in the home until they die, or rent it if they choose to move into another facility such as retirement home or assisted living arrangement). There is also a requirement for some supplemental income.
The donors, ages are 77, have an estimated present value of their life estate interest of $400,000. A life estate interest can be sold in part or in whole to a charity for cash. In this case Sharp would purchase the life estate for $400,000. The donors would use $200,000 to pay off the mortgage and use the balance to purchase a charitable gift annuity from Sharp. The annuity would pay roughly $15,000 annually to the donors for the rest of their lives. The donors get to avail themselves the home exclusion for up to $500,000. Therefore, the purchase of their life estate is not taxable to them. In addition they receive a charitable contribution deduction of approximately $70,000 that could save them $20,000 in income taxes. The calculations in this example are meant to give a broad overview of the concept and not intended to be exact figures. Donors considering this type of approach should consult their accountants and attorneys for advise in this very technical tax area.
For more information on Sharp’s planned giving program, contact J.P. LaMontagne at jp.lamontagne@sharp.com or (858) 499-4814. The use of the “bargain sale” technique at the University of California, San Diego by their Major Gift Planners has proven very successful. The donor uses the concept when real estate, on which a gift is based, is worth more than the desired gift value. It is not always convenient or practical to divide the property between portions donated and interest retained by the donor. A bargain sale allows the donor to sell the property to the University at a price significantly below its “fair market value.” The difference between market and selling price is the tax-deductible gift value. When property is long-term capital gain property, the taxable gain is reduced but not eliminated. Total appreciation is prorated between the sale and the gift portions of the transaction and the latter amount avoids taxation. The donor and the organization negotiate for the bargain sales price. They also mutually agree on the timing of cash payment and which party pays for transfer expenses and other costs. This concept is proving to be a very valuable tool for the Major Gifts Planners at UCSD. International owned properties offer another opportunity for donors to fund philanthropic goals and receive tax benefits. The general rule for gifts of foreign properties is: contributions by any corporation or individuals to United States tax exempt organization is deductible only if used exclusively for purposes specified in IRC Section 170(c)(2)(B). Treasury Reg. ß1.501(c)(3)-(d)(2) expands on the charitable purposes allowable by nonprofits. A nonresident alien or foreign corporation may claim an income tax deduction for a contribution to a U.S.-source income. This deduction has to meet several criteria but may prove an attractive reason to donate. Gifts to foreign organizations do not qualify as charitable contributions under IRS Section 170(c) guidelines. With the caveats listed above, international assets should be considered as a gifting vehicle in the planning process. Some source publications and information that might be of interest:- “Planned Giving Essentials, Second Edition,” written by Richard D. Barrett and Molley E. Ware, CFRE www.aspenpublications.com.
- “Giving Real Estate,” AARP Andrus Foundation, www.AARPAndrus.org.
- Arthur Andersen’s “Tax Economics of Charitable Giving, Thirteenth Edition.”