Here’s how to solve planned real estate gift conundrums.
A tremendous opportunity
exists for commercial real estate agents to produce additional income and
public relations benefits by providing professional services to some of the 1.6
million U.S. public charities. These charities process roughly $3 billion in real
estate donations every year, from property types that include single-family
homes, apartment buildings, shopping centers, industrial complexes, timber and
mineral rights, medical offices, and vacant land to name a few.
The CCIM Foundation has
developed Real Estate Gifting Realized (www.realestategifting.org), a program
that allows CCIM members to realize a unique win-win opportunity when they
participate in transactions involving charitable gifts of real estate.
Practitioners who understand and use the tools this program provides may
generate new sources for income, including new listing and sale assignments,
consulting projects, joint venture development, and estate trust
The niche market of
managing the real estate donation process takes a combination of understanding
the various gifting arrangements charities and donors might use, tax
implications, and relationship nurturing with the involved parties. CCIMs have
these skill sets; by repositioning them, they can access the transaction flow
created by gifting arrangements.
Many charities have very
broad fundraising efforts with specialties in real estate donation. Donors fund
their philanthropic goals while achieving worthwhile tax savings. There are
numerous reasons donors decide to gift their properties rather than sell them,
including interest in avoiding taxes, stepping out of property management
responsibilities, solving estate and family issues, or exchanging equities for
lifetime incomes guaranteed by the charity.
A Case Study
The following case study
presents some of the issues and challenges that occur in real estate gifting
A donor approached a
fundraising staff member at George Washington University with an offer to
donate her rental condominium. She was very excited because it was under
contract to sell for $550,000 with closing to take place in 10 days. The
university requires the fundraising staff to work with a real estate specialist
when dealing with potential real estate donations, and at the first meeting
with the donor, they discussed the prearranged sale.
The donor was advised that
the university would be happy to receive the gift, but under the circumstances,
the donor would be subject to a huge capital gains tax. (The basis in the
property was $50,000). The donor did not understand why the charity would not
accept the gift and give her full gift credit. The initial gift of the condo
was to be the first of two property gifts she would use toward funding an
ultimate gift of a $1 million endowed scholarship. She planned to add the
equity in a second property to the pool for the endowed fund. Should the two
net equities not equal $1 million, she intended to make up the short fall with
a provision in her will or use cash assets to fill out the commitment.
Losing credit for the
first transaction was not an option if the charity wanted to save this
wonderful donation. The team of accountants and attorneys involved in the
original property purchase agreement came up with a solution. The donor/seller
and buyer agreed to amend the purchase agreement to allow the donor/seller to
add a provision for an Internal Revenue Service Section 1031 exchange. By
exchanging the equity in the property for another property, it allowed the
donor to freely donate the second property without capital gains taxation.
The purchase of the condo
was completed as planned. The net proceeds from the closing were placed into an
escrow account controlled by a facilitating agent. With the expertise of the
university’s real estate specialist, a replacement property was located and
purchased within the guidance of IRS 1031 exchange provisions.
Once the second property
was closed, the donor leased the property for a short period of time and
decided to move forward with a bargain sales agreement. This is a simple
agreement in which a donor sells securities, real estate, tangible personal
property, or other assets to a qualified charity for less than their fair
The bargain sale
reimbursed the donor for costs related to the property exchange and the
university for funds advanced to repair the replacement property. After the
reimbursements were made, the gift was booked at very nearly the face value of
the original property value when it was first offered as a gift.
A buyer was located for
the second property and closing took place. Funds were distributed to each
party as the donation agreement spelled out.
The professionals who play
a role in this type of arrangement included a tax attorney, certified public
accountant, title company officer, the university’s general counsel, a
facilitating agent, and a Realtor with Section 1031 exchange experience.
CCIM members might be well
served to use their creative real estate knowledge to help public charities
fulfill their missions. It is estimated that more than $65 trillion of assets
will be transferred by this generation to the next during the next 25 years.
About 40 percent of this amount is in real estate equities. Seize the day!
Chase V. Magnuson, CCIM,
is president of Real Estate for Charities in Arlington, Va. Contact him at firstname.lastname@example.org.