The Return of Gifts of Real Estate
It’s simply a matter of supply and demand - when demand outstrips supply, prices rise. That is the state of today’s real estate market in many parts of the country, and therein lies the opportunity for gifts of real estate. According to statistics issued by the National Association of Realtors, in April 2018 the median already-built home price rose 5.3% over the prior year, the 74th straight month there’s been an increase in the price of already-built homes. At the same time, the number of homes for sale fell over the prior year for the 35th consecutive month. In short, supply is limited and demand is outstripping supply, causing prices to rise for already-built homes.
Those homeowners who were able to keep their homes during the Great Recession have in many cases been rewarded with values that now equal or exceed those pre-recession highs. Another segment of the real estate market is small investment properties – single family homes, condominiums, and small multi-family buildings. Owners of those properties may see the current market as an opportunity to exit these real estate investments.
What is the astute gift officer to do? Educate yourself - and your donors - as to the many ways that real estate can be used to make a gift to charity. So, let us count the ways.
Deed the Property Outright
A gift of real estate can be made outright by the donor signing and delivering a deed for the property in favor of your charity. The donor will get an income tax charitable deduction for the fair market value of the property, as determined by a qualified appraisal.
Retained Life Estate
If the donor wishes to continue using their residence, vacation home, or farm, they can deed the property to your charity and retain a life estate enabling them to use the property for their lifetime. The donor will get an income tax charitable deduction for the present value of the remainder interest given to your charity.
Contribute the Property in Exchange for a Stream of Income
Real estate is a tax-smart gift to fund a charitable remainder unitrust. If the property has substantially appreciated in value and/or has been used for investment purposes and depreciated, the tax-exempt aspect of a charitable remainder unitrust means the property can be sold without incurring federal taxes. Also, more charities with charitable gift annuity programs are now accepting real estate to fund a gift annuity.
Gift Some, Keep Some
A gift of less than a 100 percent interest in a property can be made to charity. The donor and the charity, each owning an interest, join together to sell the property. At closing, the donor and charity divide the proceeds as determined by the percentage interest they owned. The charitable deduction derived from the charitable gift can be used to help offset the capital gain taxes from the percentage interest retained by the donor. The donor could also contribute a percentage interest to a charitable remainder unitrust, in which case the proceeds from the sale of the interest donated to the unitrust can be used to pay income to the donor for life.
Sell to the Charity for Less Than the Appraised Value
Yet another option is for the donor to sell the property to charity using a “bargain sale” arrangement – i.e. less than its fair market value. The donor will receive an immediate cash payment equal to the agreed upon sale price and an income tax deduction for the difference between the sale price and the appraised value of the property. The donor will also avoid capital gains tax on the gain attributed to the gift portion of the arrangement.
Virtually every gift of real estate requires that the charity perform its due diligence, and that the donor obtain a qualified appraisal that complies with IRS requirements. Also, donors should always be told to consult their professional advisor when considering a gift of this type. Gift officers should be listening for the cues that can open the door to these potentially significant gifts.