Last year donors gave charities more than $300 billion in total gifts. Less than 3 percent came in the form of real estate equities — despite the fact that more than 40 percent of the nation’s wealth is in real estate.
That disconnect represents a great untapped source of potential income for CCIMs. The charitable world consists of approximately 1.3 million organizations. The vast majority of these institutions constantly seek funding sources. Until recently only a very small percentage of charities accepted donations of real estate. But now charities are positioning themselves to take advantage of the opportunity to raise more money by accepting property donations.
The CCIM network is perfectly placed to provide crucial services to the charitable community. On the national level, the Education Foundation of the CCIM Institute raises funds for its mission by accepting donations of real estate. In addition, it provides tools to educate CCIM members about charitable donations of real estate to help them become leaders in support of the philanthropic world.
In their local markets, CCIMs can work with individual and corporate clients to facilitate donations of real estate to charities. The benefits for clients include tax savings on capital gains, income, and inheritance, as well as estate planning and increased income streams. For CCIMs, this opportunity can provide commissions, consulting fees, a new client base, public relations exposure, and national referral opportunities. Given the growing older population concerned about retirement income, estate planning, and inheritance issues, this may be the perfect time to develop this business opportunity.
Donating Real Estate
There are various types of real estate donation arrangements, each having a specific structure to meet the Internal Revenue Service requirements to qualify for a charitable deduction for the donor. The following are the most common types of gift structures:
- Outright gift of debt-free property.
- Bargain sale in which either the donor receives cash or mortgage relief. For example, a donor couple owns a property with fair market value of $500,000 with a $200,000 mortgage. They donate it to a charity and receive an indicated charitable deduction of the difference between the FMV and the mortgage ($300,000).
- Charitable remainder trust, established by placing the property in a trust, then selling it to establish an asset on which a fixed percentage is paid to the donor for life.
- Charitable gift annuity, which is an exchange of the donor’s equity in return for a life income that is guaranteed by the charities’ full faith and credit.
- Retained life estate, which allows a donor to transfer title of his or her primary residence to a charity but remain living in it for the rest of his life.
Generally, donors receive the highest charitable deduction benefit from highly appreciated long-term capital gain property. They can use the deduction against 30 percent of adjusted gross income in the year of the donation with a five-year carry-forward on the unused portion.
Donor Challenges
Like all real estate transactions, donations arrangements are subject to several challenges. A failure to follow the IRS regulations can nullify the charitable deduction. Commercial real estate professionals assisting in real estate donations should counsel their clients to seek legal and accounting advice to avoid common pitfalls, including the following.
Unqualified appraisal. Typically this results from an outdated appraisal or an appraiser who lacks the IRS-required expertise. For residential appraisals, the IRS prefers appraisers holding the SRA designation. MAI designees are preferred for commercial appraisals, although other appraisal professionals often are acceptable. Both designations are earned through the Appraisal Institute, and appraisers holding those designations can be found at www.appraisal institute.org.
Prearranged sales. In such cases, a donor has entered into a firm contract to sell a property and then tries to give it to a charity.
Depreciation recapture implications. Tax guidance for donors is essential as some actions may not be taken into consideration. Under any gifting arrangement, accelerated depreciation over straight-line is taxable at ordinary income rates.
Completing gift documentation incorrectly. For example, if the donor has the right to control the proceeds from the sale of the property it could void the right to the charitable deduction.
Stepped transactions. In such cases, a donor offers to donate a piece of property to a charity subject to the requirement that the charity sells the property to the donor’s designee.
Professional Opportunities
Donations of real estate can provide a major source of funding for nonprofit charitable organizations. The equities can be split between several charities and properties can be located anywhere in the country.
Charities accustomed to processing real estate donations have a team of professionals to assist in facilitating their programs. Team members include tax attorneys, title companies, real estate consultants, appraisers, and the charities’ planned giving officers.
For CCIMs, this team arrangement could provide a new source of commission and consulting income. For example, in cases where donors might need to find a “facilitating” charity to accept their donation, the Education Foundation could fulfill that role. In return for handling the process, the foundation would share in the donation.
Many charitable institutions are beginning to look at real estate donations more positively. For example, George Washington University is developing a real estate division and aggressively seeking gifts of real estate. It also serves as a facilitating charity helping other foundations with their real estate donations and sharing in the proceeds.
CCIM members can learn more through seminars on the subject presented by the Education Foundation. (See “For More Info.”) They could then provide professional services to the charitable world to allow the acceptance of more donations of real estate. This would produce new income sources for brokers and promote good public relations in their communities.
Chase V. Magnuson is director of planned giving, real estate, for George Washington University in Washington, D.C., and president of Real Estate for Charities. Contact him at chase magnuson@msn.com.
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