Give & Receive
Donating Real Estate to Charities Offers Valuable Tax Savings.
Is a non-productive commercial real estate asset draining your client's cash flow? What can you do to help get rid of this white elephant while still adding value to your business?
Many investors and corporate real estate professionals are faced with cash drains created by non-productive real estate. Yet some basic obstacles can make these assets very difficult to sell. For instance, a property may be physically obsolete or in a location that is no longer viable for its intended use. Also, new city codes and ordinances often restrict a new owner's use of a property. Or, perhaps a property simply has become too expensive for the owner to maintain. Each of these circumstances can be a financial drain on an owner's portfolio.
While trying to sell a white elephant property is an option, the sale proceeds aren't always worth the time and trouble. Often such properties must be listed at a deep discount to attract buyers' attention. And, despite the reduced selling price, your client remains responsible for paying closing costs, real estate commissions, taxes, and other professional service fees. These costs can be difficult for clients to absorb -- especially if they don't earn a sizable profit on the sale.
After weighing the options, if selling isn't an economical strategy for your client, it may be time to consider a charitable donation of the property. Commercial real estate professionals and their clients can get ahead with the tax-saving benefits of charitable commercial real estate donations.
U.S. charities receive more than $200 billion in donations every year, approximately $2 billion of which are real estate gifts. During the next 15 to 20 years, total donations are expected to approach $10 trillion, with real estate equities representing about 45 percent of this sum. Numerous charities have good track records for accepting real estate donations and some have in-house support staff or professional consultants to manage the process.
While commercial real estate professionals don't earn commissions on such transactions, they are well positioned to take advantage of the attractive benefits charitable donations offer, such as consulting engagements. Oftentimes, a broker can consult both the real estate donor and the charity -- during the transaction and in the future. The relationships cultivated during the donation process can lead to more business opportunities down the road.
Commercial real estate professionals also can benefit from understanding the creative flexibility that real estate donations offer their clients and themselves. These types of transactions are good opportunities for brokers to provide clients or charities with value-added services such as change-of-use knowledge, 1031 exchanges, creative financing solutions, rezoning or other technical information, and possibly joint venture partnerships for renovating properties.
As well as broadening brokers' business prospects, donations provide clients with tax-savings opportunities while disposing of unproductive real estate. They also offer clients -- and brokers -- the option of philanthropic public relations.
Clients need an overview of the issues surrounding real estate donations and the tax-saving opportunities such gifts provide. To determine if your client is ready to donate a property, consider the following four options.
The Straight Gift.
Making a straight gift of property is the least complicated method of donating a real estate asset. One of the benefits of this option is that a client takes the full appraised value of the asset as a tax deduction at the time title transfers to the charity.
A second benefit is that the client determines the asset disposal date. Therefore, clients won't be subjected to costly delays in transferring title.
Using this option saves clients money on brokerage fees, sales taxes, and capital gains taxes. For example, a property owner sells a $1 million tract of land with a $100,000 basis. The owner pays real estate brokerage fees and closing costs of $100,000. A capital gain recognition of $700,000 is taxed at a 40 percent combined federal and state tax rate for a total of $280,000. The seller then nets $620,000.
In the gifting process, the donor takes a $1 million deduction from 30 percent of its adjusted gross income with a carry forward for any unused portion for a period of five years. The donor saves $400,000 in taxes by gifting the real estate.
Bargain Sales Option.
Another option is a bargain sale, whereby the difference between the market price and sale price is the tax-deductible gift value. Clients can use this technique to receive part of the equity in cash, and the balance of the appraised equity becomes a deductible donation. The client pays taxes on the cash portion and can use the balance as a charitable gift tax deduction.
For instance, a client owns a property with a fair market value of $500,000. He agrees to sell the property to a certified charity for $500,000. The charity pays $200,000 in cash, and the client donates the difference of $300,000.
Charitable Remainder Trust.
Using the real estate as the funding source, a client may create a charitable remainder trust. In this process, the donor deeds the property into an irrevocable trust whereby the donor receives an income stream for life. The certified charity gets the trust asset at the death of the donor.
A trust can be established for the benefit of more than one donor's life. This is how the gift deduction is calculated for tax purposes and the rate of return is calculated for the beneficiaries. The charity is the remainderman of the trust and receives the corpus or assets of the trust at termination. Under this scenario, the donor receives an income stream, as well as a tax deduction.
For example, your corporate client owns a piece of property with an appraised value of $10 million, with $1 million basis. The corporation funds the charitable remainder trust with the property, and the charity is named as irrevocable remainderman of the trust. An appointed trustee, which can be the donor, a bank, an attorney, or anyone of legal age, then sells the property and invests the cash proceeds. The corporation receives 6.5 percent annual income from the trust assets. At termination of the trust, the remainderman -- in this case, the charity -- receives the assets, and the corporation avoids capital gains taxes and receives a gift tax deduction and cash flow.
Another donation option is a donor-advised fund, in which the donor places an asset in a public charity and offers suggestions as to the beneficiaries in perpetuity. This allows a client to have input in a philanthropic program. Each year, the donor can suggest how much of the fund goes to different charities, offering flexibility in charity selection and support levels.
Getting Help Organizations are developing new options for donors who want to use real estate to fund charitable gifts. For example, Morgan Stanley Dean Witter's Institutional Group has a program to manage the funds once the equity in the real estate has been converted to cash.
Also, some real estate professionals and charities specialize in facilitating real estate asset donations. These charities share proceeds with the donor's favorite charity. The National Real Estate Foundation, Realty Restoration Gift Fund, and Real Estate Donations are just a few of the major facilitating charities. A more complete list can be found online at GuideStar.com.
Donations may provide an exit strategy for owners of negative cash flow properties, while at the same time creating substantial funding for the charitable world. Commercial real estate professionals should keep the benefits of charitable donations in mind for their clients' underperforming real estate assets. Not only can charitable gifts offer them considerable tax savings, but the process also can help boost your commercial real estate consulting profits