Real Estate Gifting Realized
What Are the Options?
This is the
first in a series of articles on real estate gifting issues.
Real Estate Gifting Realized, the
new program launched by the Education Foundation of the CCIM Institute,
facilitates the donation of real estate to charitable organizations. A donation
may be made directly to the CCIM Foundation, or the Foundation can facilitate
the donation to a chosen charity, since many charitable organizations do not
have the expertise to handle real estate donations. To play a role in this
process, commercial real estate professionals must understand the many
alternatives available to donors when gifting real estate.
the Right Option
Individuals or representatives of companies
and organizations looking to divest real property have a number of options when
donating real estate. These include outright donation, bequest, bargain sale,
charitable gift annuity, charitable remainder trust and retained life interest.
Some of the alternatives provide an income stream and all may result in
charitable tax deductions and the avoidance of capital gains tax. The benefits
of each choice should be thoroughly understood by a donor and discussed with an
attorney or financial adviser.
Here is a
brief overview of each option.
An outright donation is immediate and
occurs when an individual or corporation deeds real property to a charity
outright or in trust. This is a clean transaction and does not activate capital
gain tax to the donor. It also results in a charitable tax deduction.
A bequest is not immediate, as it occurs
in a will where a charity is identified as a beneficiary upon the death of the
a bargain sale, real property is
sold to a charity at less than fair market value. The donor bypasses gain on
the gift portion and receives a charitable deduction on the gift portion but
must recognize gain on the value received. In order for a transfer to qualify
for bargain sale treatment, it must produce a charitable contribution income
tax deduction under the Internal Revenue Code, and if the donor can’t take the
deduction in the year of transfer because of other deductions, it can be
donations that provide income to the donor are structured as charitable gift
annuities, charitable remainder trusts, or retained life interests.
Charitable gift annuities occur when
a donor transfers real estate in exchange for a guaranteed life income under a
contract. Generally, the charity receives the property, sells it, and
contributes the proceeds to a trust company to make payments to the donor. A
portion of the annuity income may be received by the donor tax free, but any
capital gains taxes on the asset transferred in exchange for the annuity are
paid over the annuitant’s life expectancy and determined by Internal Revenue Service
tables. The amount of the annuity payment is fixed and does not change over
time. At least 10 percent of the fair market value of the asset transferred
must be left for the charity. Note that this type of annuity is not available
in all states due to state regulation.
Charitable remainder trusts are irrevocable
trusts with two sets of beneficiaries: the income beneficiary and the
charitable beneficiary. The income beneficiary is usually the donor who
receives a percentage of income from the trust for life or a term of years. The
charitable beneficiary receives the principal of the trust after the income
beneficiary dies. The amount of income received by the donor depends upon the
payout percentage chosen and the amount of income generated within the trust.
remainder for the charity must be at least 10 percent of the fair market value
of the assets transferred to the trust, which means that the annual payment to
the donor will change each year depending on the value of the trust property.
The higher the percentage payout, the lower the charitable income tax
deduction. IRS rules cover percentage payouts and determine the net fair market
value of the assets.
In a retained life estate, a donor makes a
donation of a primary or secondary home but continues to live in it or elects
to rent it out for rental income, but also obtains a charitable deduction based
on guidelines established in IRS tables. The deduction is the actuarial value
of the reminder interest contributed to the charity. Upon the donor’s death,
the property passes to the charity.
real estate professionals and their clients should explore these various
options when evaluating the benefit of a charitable donation of real property.
Each type has specific processes to follow to achieve optimal benefit to the
donor and must be evaluated with the assistance of individuals with expertise
in real estate gifting issues in order to make an informed decision.
Mary Stark Hood, JD, CFP, is president
of the Hood Group, which provides consulting services to business organizations
and foundations. She currently serves as a consultant to the CCIM Foundation’s
Real Estate Gifting Realized Program. Contact her at firstname.lastname@example.org. Learn
more about the Foundation’s gifting program at www.realestategifting.org.