minnesota real estate foundation 2 opportunities & pitfalls of real estate gifts jerome l...

Minnesota Real Estate Foundation

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Opportunities & Pitfalls of Real Estate Gifts

Jerome L McCarter, CPA

Minnesota Planned Giving ConferenceNovember 4, 2009

http://www.realestategiving.org/index.php4


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Why Real Estate? Significant asset holding of many individuals. Wealthiest donors

frequently own multiple properties.

Asset class that has shown significant price appreciation, particularly for donor prospects age 65 and older.

Needed by many non profits to carry out their mission.

Opportunity for significant tax savings for the donor:

• Charitable tax deduction at fair market value.

• Avoid capital gains tax upon sale of the property.

Can be used effectively with planned giving vehicles such as Charitable Remainder Trusts, Charitable Lead Trusts, and Charitable Annuities.



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Real estate provides a viable charitable giving opportunity

Real estate comprises over 40% of the net worth of individuals in the U.S. Estimated at $25-$30 trillion of individual’s net worth.

Immediate tax deduction at appraised value, donor doesn’t have to wait for property to sell.

Real estate gifting allows the donor to reach charitable giving levels they may not have previously considered possible.

Real estate gifting can reduce capital gains, income taxes, and estate taxes.

Relieves the donor of potential property management headaches.



…but it does present challenges.

Real estate gifting is not simple.

Real estate gifting is not “top of mind”, comprising only 2% of charitable contributions in U.S.

Not all real estate can be gifted.

Real estate is not easily divisible.

Real estate requires special skills to evaluate, time to liquidate, and has a risk associated with holding and liquidating.

Debt financed real estate may create UBTI for the donee charity.

Reverse mortgage option eliminated for donor.

Uncertain hold and carry period.

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Types Of Real Estate Suitable For Gifting

Raw Land

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Personal Residence

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Vacation Home/ Recreational Property

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Farm Land

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Residential Rental Property

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Commercial Building

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Types Of Real Estate Interests Gifted

Complete Interest

Remainder Interest

Tenants in Common Interest

Time Share Interest

Foreign Trust Interest

Partnership or LLC Interests (Real Estate Entities)

Corporate Interests (Real Estate Entity)

Real Estate Investment Trust Interest

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Donor Real Estate Gifting Options

Gift Sale Proceeds To One Or More Charities

Gift Sale Proceeds To A Donor Advised Fund At A Community Foundation

Gift Sale Proceeds To Purchase A Charitable Annuity

Gift Sale Proceeds To Fund A Charitable Remainder Trust

Gift OF A Personal Residence Or A Second Home And Retain A Life Estate

Gifts Passing Through A Will Or Bequest

Gifts Of Real Property To A Charitable Lead Trust

Conservation Easements

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Outright Gift Example

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Case Study

Donor owns a 24 unit apartment complex with an original cost basis of $100,000 for the land and $1,000,000 for the building.

The building has been depreciated on a straight line basis to $200,000.

The fair market value of the property is $1,350,000.

Donor is in a 42% state and Federal tax bracket for ordinary income and 22% for long term capital gains. Unrecaptured section 1250 gain is taxed at a rate of 32% state and Federal.

Donor’s Adjusted Gross Income is sufficient to fully utilize a $1,350,000 charitable gift of appreciated real estate. (average $750,000 per year).

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Case Study Outright Gift of Property-Net Cost To The Donor

Fair market value of the gift$1,350,000

Less: Income taxes on the long term capital gain @ 22% ( 55,000)

Less: Income taxes on the unrecaptured 1250 gain @ 32% ( 256,000)

Net cash available after tax on gain on sale $ 1,039,000

Less: Income tax savings on charitable gift ( 567,000)

Net Cost To Donor $ 472,000

Percentage of gift subsidized by tax savings65% 16



Charitable Remainder Trust Example

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Case Study

Charity

Gift of Property•$1,000,000 Property•$100,000 Basis

Benefit to Donor•$371,750 income tax deduction•Avoid capital gains on $900,000 ($198,000 savings)•$50,000 in estimated first-year income

Remainder to Charity

$1,973,587

Unitrust

5%



Case Study

A local professional advisor has a 65 year old client with undeveloped real estate worth $1,000,000 and a cost basis of $100,000.

The donor transfers the real estate to a Charitable Remainder Unitrust (5%). Assume the property sells during the year of the gift.

The donor receives an income tax deduction of $371,750, pays no capital gains taxes when the property is sold (a savings of $198,000), and receives an annual income stream in excess of $50,000 over the remainder of their life (assumed to be another 23 years).

Based on donor’s life expectancy and assuming the trust corpus is invested at 8% over the term of the trust, the remainder trust corpus of $1,973,587 will be transferred to charity upon the donor’s death.

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Keys Areas of Concern with Gifts of Real Estate

Liability to the charitable organization (environmental)

Holding/carrying costs

Zoning restrictions, easements, and other limitations

Debt on property

Marketing/selling property

Future considerations (rezoning, assessments)

Donor relations nightmare



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Procedures for Accepting Gifts of Real Estate

Authority (Two officers generally required to accept a gift)

Evaluation (required pre-acceptance procedures)

Responsibilities of Donor

Marketing and Sale of Real Estate

Gifts by Bequests

What the Donee Charity Should Not do



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Evaluation of Gifts

Property inquiry form

Liens, mortgages and encumbrances

Field evaluation

Preliminary market evaluation

Expense budgets (best case, likely case, worst case)



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Responsibilities of the Donor

Complete property inquiry form

Provide an environmental audit if deemed necessary

Obtain a qualified appraisal

Provide evidence of title, title insurance

Prepare a warrantee deed

Reach agreement on responsibility for carrying costs

Sign indemnification agreement

Sign a contribution agreement



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Marketing and Sale of Real Estate

Marketing and sales plan developed with donor. Generally, arrangements made through a qualified real estate agent.

Initial sale price of the property will be the appraised price.

Sale reported on the IRS Form 8282.

Charity must control the process.

Always use legal counsel.



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Gifts by Bequests

Charities will attempt to follow the same due diligence as they use with an outright gift during the donor’s lifetime.

Real estate bequests may be refused.

Donors are encouraged to talk with the charity prior to naming them in their will or estate plan. Not all charities accept real estate gifts.



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What the Charity Should Not Do

Pay for legal or other services, especially the appraisal.

Establish or corroborate the value of a property for income tax purposes.

Never accept a gift with an appraised value far in excess of fair market value. No charity should ever be associated with a transaction it knows or suspects is fraudulent.

Except in extraordinary circumstances, remove or assume debt of a donated piece of real estate.

Accept a gift without a complete and through understanding of the risks associated with the property.



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Questions and Answers

For further information please contact:

Steve Joul, Mike Burton or Jerry McCarter

Minnesota Real Estate Foundation101 S. Seventh Ave., Suite 100

St. Cloud MN 56301320-253-438877-253-4380

www.RealEstateGiving.org


minnesota real estate foundation 2 opportunities & pitfalls of real estate gifts jerome l...

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