Charitable gifts can be a tax-wise alternative for investors.
Charitable remainder trusts are unique and powerful
giving tools with useful applications in commercial real estate. CRTs often are
employed to address the three biggest tax hurdles real estate investors face:
current income tax, capital gains tax, and estate tax. In addition, with CRTs
donors can make significant contributions to their favorite nonprofit
Commercial real estate professionals can structure CRTs
to help clients accomplish their specific charitable, tax, and financial goals.
Generally, the most basic CRT structures involve the following steps:
1. Client establishes a personal CRT with the help of
2. Client transfers property (usually a highly
appreciated investment) to the trust via a quit-claim deed.
3. Client receives an immediate current income tax
deduction, which can be rolled over for up to five additional years if
necessary, to help offset income from other sources.
4. CRT sells the property incurring no capital gains tax.
5. CRT makes annual payments to the client for the rest
of the client's life, similar to a pension or annuity.
6. Upon the client's death, all remaining assets in the
CRT are transferred to the designated charity estate tax-free and the CRT
While this is a simplified explanation of the general
processes involved in creating CRTs, many variations can be applied to fit each
client's unique circumstances. The following examples highlight possible CRT
scenarios in common situations commercial real estate professionals and their
Capital Gains Tax
Bob owns a piece of raw land worth $3 million with almost
no cost basis, meaning he'll face a capital gains tax bill of $450,000 if he
sells, leaving him $2,550,000 to reinvest. However, in the event Bob passes
away, his investment will be subject to an estate tax of $1,173,000 (using the
maximum 46 percent bracket).
Following the steps outlined above, Bob could use a CRT
to sell the land, eliminating the capital gains tax. The CRT then would have
the entire $3 million to reinvest to produce income for Bob, and none of the
money would be subject to death taxes in the event Bob passes away.
Two opportunities allow taxpayers to utilize CRT
structures in conjunction with tax-deferred exchanges. The first uses a CRT as
an alternative to a 1031 exchange. Whereas the exchange postpones the tax bill,
a CRT eliminates it and provides the client with an immediate tax deduction to
offset other income.
CRTs' second use assists clients who have completed 1031
exchanges in the past. Many clients have substantial gains built up in various
properties as a result of executing several exchange transactions. In some
cases clients may want to sell but feel trapped and unable to get out of their
investments without completing another exchange. CRTs may be an excellent
alternative to consider in these instances.
The previous examples assume a property will be sold and
capital gains tax is a concern. However, a property does not have to be sold as
part of a CRT strategy.
For instance, suppose a client who owns rental property
has tax and charitable giving needs but doesn't want to give up the rental
income. This client can transfer the rental property to a CRT and have the
trust pay the rental income to the donor each year. The upfront tax deduction
will help the client net more after-tax cash than in previous years and may
help offset income for up to five years. The property is removed from the
estate for death tax calculations, allowing the client to leave a tremendous
legacy to his favorite charity.
Business owners who retire and sell their businesses
(and/or associated real estate holdings) often are concerned with the sale's
tax ramifications as well as generating sufficient income to support their
lifestyles. CRTs address both issues.
Assume a business owner transfers 50 percent of his stock
in a closely held company to a CRT. When the business sale is completed, this
portion of the transaction is tax-free and the deduction generated by using the
CRT helps to offset the tax bill from the other 50 percent. Since the trust
will pay income to the former business owner for life, it acts like a personal
Why Use CRTs?
CRTs are popular in areas where commercial real estate
values have increased dramatically. Specifically, real estate pros can use CRTs
as marketing tools to convince sellers who might be inclined to hold property
due to capital gains tax concerns. Since one of the principal purposes of CRTs
is to provide income annually, commercial real estate brokers can use CRTs to
help clients convert raw land into income-producing property. Clients will
enjoy a sizeable tax deduction upfront and the land sale will not incur capital
To best learn how to advise clients on the nuances of
CRTs, commercial real estate pros should consult qualified professional
financial advisers who are knowledgeable in this field. It may be possible to
collaborate on marketing efforts such as seminars to educate property owners on
the potential tax advantages of using CRTs.
Commercial real estate brokers also should make
themselves available as a resource to local charities. Nonprofits can be a
referral source when donors wish to use real estate as part of their giving
strategy. This may include selling property the nonprofit has accepted as a
gift, assisting with a CRT strategy, providing a market analysis, or even
helping the nonprofit acquire new property for its operations.
As with any advanced tax strategy, CRTs may not be
applicable for all clients. However, for those clients who are charitably
inclined and have significant tax concerns, CRTs can be a saving grace. Commercial
real estate pros who can bring these types of solutions to their clients can
gain valuable market share in their local communities.