Between now and the year 2050 the United States will experience an unprecedented growth in the older adult population. Baby Boomers born between 1944 and 1964 will be transferring an enormous amount of wealth to their children and grandchildren, an amount estimated at $30 trillion and often referred to as the “Great Wealth Transfer.” As society anticipates the largest intergenerational transfer of wealth in history, donors are seeking strategic philanthropic investments that will make a significant impact not only in their lifetime, but in generations to come.
As previously discussed in our article titled “Endowments – a Key to Sustainability,” donors are increasingly establishing permanent endowment funds that benefit their favorite charities in perpetuity. But… it takes a lot of resources to fund an endowment of sufficient size to produce a meaningful amount of annual income for the charitable organization.
One Solution: Donated Real Estate
Real estate is typically the most highly appreciated asset owned by an individual or a family. When that real estate is sold, substantial capital gains may result with a corresponding tax liability.
Donors wanting to make a sizable gift to charity may find real estate to be an appealing alternative to limited cash resources. Real estate gifts offer opportunity to leverage a value asset to benefit a donor’s favorite charity and to leave an enduring legacy gift. A donation of marketable real estate that has been held for more than one year and is relatively easy to liquidate has potential to provide substantial benefits to both the donor and the recipient nonprofit organization.
- Tax Planning: As the value of real estate appreciates over the years, a property owner may face a pending tax situation resulting from the increase in market value over the amount the owner originally paid. The difference between the owner’s basis (original purchase price) and current market value will be taxed at capital gains tax rates when the property is sold. However, if the owner chooses to contribute the real estate to a nonprofit organization, the donor may avoid the capital gains tax, and the market value of the property is eligible for a tax deduction (subject to the donor’s unique tax situation). And the nonprofit organization receiving the gift of real estate is tax exempt and thus does not pay any taxes when the property is sold.
- Charitable Designations: The net proceeds of the property sale may:
- Immediately benefit the charitable organization’s mission and programs, or
- Be placed into a donor-advised fund where the donor serves as an “advisor” on the fund for purposes of grant distributions, or
- Be invested in a permanent endowment fund, where the endowment bears the name of the donor(s) or their family, leaving a named legacy fund that recognizes the donor’s generosity in perpetuity.
- Property Management: Once the real estate is transferred, the nonprofit organization takes over responsibility for managing the real estate while it is sold. Gifting the property means the donor does not have to deal with real estate brokers or pay fees involved in the sale of real estate – it is all handled by the nonprofit organization. And in some cases income-producing property may be retained and managed by the nonprofit for a short- or long-term period, producing ongoing income for programs, operations, or a donor-advised fund.
- Timing of Donations: A donor may be involved in a personal or business financial transaction that results in a large tax obligation, such as the sale of their business enterprise. If the donor has available real estate with significant appreciated value and as such will be facing a future capital gains tax situation when that real estate is sold, the donor may choose to donate the appreciated real estate and take advantage of the market value tax deduction to help offset the tax obligation from their business sale.
- Quality of Life: An individual nearing retirement who has sufficient financial resources may simply grow tired of managing a parcel of rental property and the associated liability and financial obligations and take the opportunity to donate the real estate to a nonprofit organization that takes over management of the property.
Examples of Potential Real Estate Donations
- A second home, vacation home or cabin in the mountains that is no longer needed
- Undeveloped “vacant” land
- A personal residence (often listed in a donor’s estate plan, and gifted upon passing)
- Rental property, such as a small apartment complex
Other Considerations
- Debt-Financed Property: If the real estate is encumbered with debt, such as a mortgage, while it does not preclude a donation of the property it does introduce complexities, including potential tax consequences to both the donor and the nonprofit organization. While it is best to donate debt-free real estate, if you have property with debt you wish to donate, consult your tax or legal advisor for guidance.
- Qualified Appraisals: Contributions of real estate with a value in excess of $5,000 require an appraisal from a qualified appraiser, and completion of IRS Form 8283 to support the donor’s income tax deduction.
- Contribution Limits: Generally the tax deductibility of donations to a public charity of appreciated non-cash assets held more than one year is limited to 30% of adjusted gross income (AGI). If the amount is greater than what can be used in one year, the excess deduction can be carried forward for up to five years. Be sure to consult your tax professional for advice specific to your situation.
- Prearranged Sales: If you are already negotiating sale of your real estate to a third party but decide to donate it instead, be sure not to finalize negotiations prior to the donation. Any written documentation that supports prior discussions with a third party must not imply that the sale was prearranged, so that the IRS does not assess a capital gains tax to the donor.
- Planned Giving Options: Donated real estate may, in some cases, be used to fund a charitable gift annuity or a charitable remainder trust, where the donor obtains a tax deduction, secures a lifetime income, and ensures that when the donor passes away the remaining balance of the gift goes to the nonprofit organization identified at the time of the gift and for a designated purpose such as the formation of a permanent endowment fund. Your estate planning advisor can help you determine which options are best for you.
If you are interested in a possible donation of real estate, we would enjoy meeting with you to discuss your charitable goals. Please reach out to Bob Kelly at bob@sdscf.org.
Please be aware that gifts of appreciated non-cash assets can involve complicated tax analysis and advanced planning. This article is only intended to be a general overview of some donation considerations and is not intended to provide tax or legal guidance. Please consult with your tax or legal advisor.
