This is the first in a series of articles on real estate gifting issues.
Real Estate Gifting Realized, the new program launched by the Education Foundation of the CCIM Institute, 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, since many charitable organizations do not have the expertise to handle real estate donations. To play a role in this process, commercial real estate professionals must understand the many alternatives available to donors when gifting real estate.
Choosing the Right Option
Individuals or representatives of companies and organizations looking to divest real property have a number of options when donating real estate. These include outright donation, bequest, bargain sale, charitable gift annuity, charitable remainder trust and retained life interest. Some of the alternatives provide an income stream and all may result in charitable tax deductions and the avoidance of capital gains tax. The benefits of each choice should be thoroughly understood by a donor and discussed with an attorney or financial adviser.
Here is a brief overview of each option.
An outright donation is immediate and occurs when an individual or corporation deeds real property to a charity outright or in trust. This is a clean transaction and does not activate capital gain tax to the donor. It also results in a charitable tax deduction.
A bequest is not immediate, as it occurs in a will where a charity is identified as a beneficiary upon the death of the donor.
In a bargain sale, real property is sold to a charity at less than fair market value. The donor bypasses gain on the gift portion and receives a charitable deduction on the gift portion but must recognize gain on the value received. In order for a transfer to qualify for bargain sale treatment, it must produce a charitable contribution income tax deduction under the Internal Revenue Code, and if the donor can’t take the deduction in the year of transfer because of other deductions, it can be carried over.
Charitable donations that provide income to the donor are structured as charitable gift annuities, charitable remainder trusts, or retained life interests.
Charitable gift annuities occur when a donor transfers real estate in exchange for a guaranteed life income under a contract. Generally, the charity receives the property, sells it, and contributes the proceeds to a trust company to make payments to the donor. A portion of the annuity income may be received by the donor tax free, but any capital gains taxes on the asset transferred in exchange for the annuity are paid over the annuitant’s life expectancy and determined by Internal Revenue Service tables. The amount of the annuity payment is fixed and does not change over time. At least 10 percent of the fair market value of the asset transferred must be left for the charity. Note that this type of annuity is not available in all states due to state regulation.
Charitable remainder trusts are irrevocable trusts with two sets of beneficiaries: the income beneficiary and the charitable beneficiary. The income beneficiary is usually the donor who receives a percentage of income from the trust for life or a term of years. The charitable beneficiary receives the principal of the trust after the income beneficiary dies. The amount of income received by the donor depends upon the payout percentage chosen and the amount of income generated within the trust.
The remainder for the charity must be at least 10 percent of the fair market value of the assets transferred to the trust, which means that the annual payment to the donor will change each year depending on the value of the trust property. The higher the percentage payout, the lower the charitable income tax deduction. IRS rules cover percentage payouts and determine the net fair market value of the assets.
In a retained life estate, a donor makes a donation of a primary or secondary home but continues to live in it or elects to rent it out for rental income, but also obtains a charitable deduction based on guidelines established in IRS tables. The deduction is the actuarial value of the reminder interest contributed to the charity. Upon the donor’s death, the property passes to the charity.
Commercial real estate professionals and their clients should explore these various options when evaluating the benefit of a charitable donation of real property. Each type has specific processes to follow to achieve optimal benefit to the donor and must be evaluated with the assistance of individuals with expertise in real estate gifting issues in order to make an informed decision.
Mary Stark Hood, JD, 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