This second
article in a series on real estate gifting issues covers outright donations,
various requirements for a donation to be tax deductible, and bequests.
Commercial real estate
professionals and their clients should consider all options when discussing the
charitable donation of real property. Real Estate Gifting Realized, the new
program launched by the CCIM Foundation, 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.
Donations
An outright donation is immediate
and occurs when an individual or corporation deeds real property to a charity
outright or in trust. According to Revenue Rulings, there is “no binding
agreement” as of the date of the gift so the transaction is clean, doesn’t
activate capital gains tax to the donor, and results in a charitable tax
deduction.
Donors considering real estate
gifts are not only focused on philanthropic intent but also interested in the
tax advantages that apply to charitable donations and deductions. Therefore, to
determine the value of the donation, an experienced appraiser must be used for
real estate. Internal Revenue Service form 8283 must be attached to the donor’s
tax return and the appraiser must sign that he or she is unrelated to the donor
and meets other requirements for qualified appraisers. The appraisal must be
made no earlier than 60 days before the donation. Finally, the donee
organization must acknowledge the receipt of the property on the form if the
donation exceeds $5,000. Even with an appraisal in hand, there are limits on
deductions for the donor. Deduction ceilings apply to donations of appreciated
property held long term, the deduction ceiling is generally 30 percent of
adjusted gross income for individuals and 10 percent of net profit for
corporations.
If a donation is being made simply
to avoid certain obligations or to benefit on a quid pro quo basis, it may be
disallowed. Therefore, it’s important that the donor seeks advice from an attorney,
CPA, or financial adviser. Understanding the tax implications and projecting income
for at least five years is the first step in the process. This is necessary
because with a substantial donation that exceeds the annual ceiling for
donations, as can be the case with real estate, it’s possible that the full
donation cannot be completely taken during the year it’s made. Donors should
project income to assure full use of the deduction because when annual
donations exceed the limit, the excess may be carried over for the next five
years. There have been instances where deductions have been lost because
projection of future income was not considered at the time of the donation.
In addition to federal tax issues,
a donor’s advisers must also be cognizant of state tax issues. In respect to
charitable deductions, there are compliance states, restricted deduction states,
and no deduction states. Compliance states permit taxpayers to take the same
deductions for charitable gifts that are taken from their federal taxable
income. Restricted deduction states are those that either allow a deduction
that is less than the federal return permits, or use a completely different
method to determine the charitable deduction. No-deduction states do not allow
donors to deduct the value of the charitable gift.
Bequests
A bequest differs from an outright
donation in that it is not immediate but occurs in a will where a charity is
identified as a beneficiary upon the death of the donor. The bequest can be
specific, naming a specific piece of real property for the charitable
beneficiary, or it can be contingent or residual and only become available to
the charitable organization after other bequests are satisfied. For example, a
contingent bequest might direct an estate to a charitable organization if all
of the donor’s children predecease him. A residual bequest could be for
whatever is left in the estate after debts, expenses, taxes, and other bequests
have been paid. In the case of a bequest of a specific piece of real property,
charities may not be aware of the donation and may find a need to immediately
evaluate it determine the viability of
reselling the property, and may decide to disclaim a bequest of real property
if they identify problems such as environmental hazards or disrepair.
Therefore, it’s wise for a donor to share information on this type of bequest
with the charity in advance. Tax deductions apply and this bequest is
deductible for estate tax purposes.
Real estate gifting can be
complicated so it’s imperative that the donor’s advisers are involved when
working with a charitable organization and its advisers. The rules on
charitable deductions to qualified charities are very detailed and require
review at the time a charitable donation is contemplated.
Mary Stark Hood, J.D., 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 maryshood@comcast.net. Learn
more about the foundation’s gifting program at www.realestategifting.org.