Charitable Strategies to Help Your Clients
For many donors, real estate assets represent a significant portion of their wealth, but nationwide, gifts of real estate make up less than three percent of charitable contributions every year. Two primary reasons cause this disparity:
- Donors are often unaware that a charitable gift of real estate can be a significantly tax-advantaged way to dispose of property.
- Charities reject an estimated 80 percent of real estate donations offered to them.
Fortunately, professional advisors can team up with CICF to tackle these obstacles and maximize your clients’ philanthropic power.
Individuals with property that has significant long-term appreciation may be able to realize two tax benefits by contributing the property outright to charity. First, the donor may take the full fair market value tax deduction for the property, and second, the donor may eliminate the substantial capital gains tax they would incurr if the property was sold and the proceeds were donated. Please note, however, gifts of real estate have the following limitations on the amount of the charitable contribution deduction:
- Real estate encumbered by debt will trigger bargain sale rules and limit the amount of the deduction.
- Depreciation previously taken and subject to recapture may reduce the deduction.
- In most cases, the deduction is limited to 30 percent of the donor’s adjusted gross income.
As a community foundation, CICF is equipped to accept charitable gifts of real estate, which are more complex and less liquid than more conventional assets given to charity—such as cash or publicly traded stock. Furthermore, the ability to contribute real estate to a donor-advised fund at CICF, as opposed to a single charity, allows donors to recommend grants to many different charitable organizations, set up a schedule for giving over the course of many years, and/or pass down the fund so heirs can continue to make grant recommendations after the donor’s lifetime. CICF’s Policy for Gifts of Real Property sets forth the procedures by which CICF may accept gifts of real estate. In addition to accepting outright gifts of real estate, CICF will also consider accepting other interests in property such as partial interests, life estates or leaseholds. CICF works with donors to evaluate potential real estate gifts and determine the need for environmental assessments, disclosures, evidence of title, evaluations as to the marketability of the property and other necessary assessments, evaluations and/or investigations.
As a general rule, for CICF to accept a gift of real estate, it should appear reasonably certain that the proposed gift will be sold or liquidated for a fair value and the proceeds received into a component fund of CICF, or that it will generate annual income sufficient to provide a reasonable rate of return for the component fund in which is received. Any donor engaged in negotiations with a potential buyer before completing the gift of real estate should be cautioned against moving too far along in the process prior to the completion of the charitable gift. If there is an identified purchaser, an identified price and a legally enforceable agreement to sell the property, the IRS may be able to demonstrate that that donor donated the proceeds of the sale, rather than the property itself – and thus would not be able to eliminate the capital gains tax obligation. In determining whether to accept a potential gift of real estate, CICF will evaluate the carrying costs, such as taxes, insurance and maintenance, associated with holding the property until it can be liquidated.
Gifts of real estate are on the rise at CICF, thanks, in large part because to professional advisors. A client of local CPA Mike Giannamore of MGA Professional Corporation, owned a lakefront property but grew tired of maintenance costs and real estate taxes. Giannamore advised his client to donate the property to Legacy Fund, the CICF affiliate of Hamilton County, and the proceeds of the sale are now in the client’s donor-advised fund. Similarly, when the beneficiary of an estate inherited a residence for which he had no need, estate planning attorney, Tim Ryan at Hackman Hulett, LLP, suggested to the beneficiary that he utilize the residence as the principal funding vehicle for a memorial donor-advised fund. Attorneys Bill Holwager, Holwager & Holwager, and Andrew Vento, Ice Miller, have also been involved with recent gifts of real estate. One of Holwager’s clients benefited a scholarship fund rather than a donor-advised fund.
In order to claim a charitable income tax deduction for a gift of real estate, a donor must obtain a qualified appraisal in compliance with Treasury Regulation 1.170A-13(c)(3) and attach IRS Form 8283 to his or her tax return for the year in which the deduction is claimed. The appraisal must be made (1) no earlier than 60 days prior to the date of the gift and (2) before filing the tax return on which the deduction is claimed.
Even with these extra steps and limitations in mind, with the right philanthropic partner, donating real estate directly to a community foundation or other non-profit organization enables donors to give more than they would if they had utilized more conventional assets. When working with your clients on charitable giving, don’t forget to consider their real property assets as an option that may maximize their tax benefits and their philanthropic impact.
To learn more about how CICF can help you develop win-win charitable strategies for your clients, contact Mary Stanley, director of gift planning and legal affairs, at email@example.com or 317.634.2423 x 319 or Sarah Weaver, senior gift planning advisor, at firstname.lastname@example.org or 317.634.2423 x 510.