This second article in a series on real estate gifting issues covers outright donations, various requirements for a donation to be tax deductible, and bequests.
Commercial real estate professionals and their clients should consider all options when discussing the charitable donation of real property.
Real Estate Gifting Realized, the new program launched by the CCIM Foundation, 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.
An outright donation is immediate and occurs when an individual or corporation deeds real property to a charity outright or in trust. According to Revenue Rulings, there is “no binding agreement” as of the date of the gift so the transaction is clean, doesn’t activate capital gains tax to the donor, and results in a charitable tax deduction.
Donors considering real estate gifts are not only focused on philanthropic intent but also interested in the tax advantages that apply to charitable donations and deductions. Therefore, to determine the value of the donation, an experienced appraiser must be used for real estate. Internal Revenue Service form 8283 must be attached to the donor’s tax return and the appraiser must sign that he or she is unrelated to the donor and meets other requirements for qualified appraisers. The appraisal must be made no earlier than 60 days before the donation.
Finally, the donee organization must acknowledge the receipt of the property on the form if the donation exceeds $5,000. Even with an appraisal in hand, there are limits on deductions for the donor. Deduction ceilings apply to donations of appreciated property held long term, the deduction ceiling is generally 30 percent of adjusted gross income for individuals and 10 percent of net profit for corporations.
If a donation is being made simply to avoid certain obligations or to benefit on a quid pro quo basis, it may be disallowed. Therefore, it’s important that the donor seeks advice from an attorney, CPA, or financial adviser. Understanding the tax implications and projecting income for at least five years is the first step in the process. This is necessary because with a substantial donation that exceeds the annual ceiling for donations, as can be the case with real estate, it’s possible that the full donation cannot be completely taken during the year it’s made.
Donors should project income to assure full use of the deduction because when annual donations exceed the limit, the excess may be carried over for the next five years. There have been instances where deductions have been lost because projection of future income was not considered at the time of the donation.
In addition to federal tax issues, a donor’s advisers must also be cognizant of state tax issues. In respect to charitable deductions, there are compliance states, restricted deduction states, and no deduction states. Compliance states permit taxpayers to take the same deductions for charitable gifts that are taken from their federal taxable income.
Restricted deduction states are those that either allow a deduction that is less than the federal return permits, or use a completely different method to determine the charitable deduction. No-deduction states do not allow donors to deduct the value of the charitable gift.
A bequest differs from an outright donation in that it is not immediate but occurs in a will where a charity is identified as a beneficiary upon the death of the donor. The bequest can be specific, naming a specific piece of real property for the charitable beneficiary, or it can be contingent or residual and only become available to the charitable organization after other bequests are satisfied. For example, a contingent bequest might direct an estate to a charitable organization if all of the donor’s children predecease him.
A residual bequest could be for whatever is left in the estate after debts, expenses, taxes, and other bequests have been paid. In the case of a bequest of a specific piece of real property, charities may not be aware of the donation and may find a need to immediately evaluate it determine the viability of reselling the property, and may decide to disclaim a bequest of real property if they identify problems such as environmental hazards or disrepair. Therefore, it’s wise for a donor to share information on this type of bequest with the charity in advance. Tax deductions apply and this bequest is deductible for estate tax purposes.
Real estate gifting can be complicated so it’s imperative that the donor’s advisers are involved when working with a charitable organization and its advisers. The rules on charitable deductions to qualified charities are very detailed and require review at the time a charitable donation is contemplated.
Mary Stark Hood, J.D., 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.
– See more at: http://www.ccim.com/cire-magazine/articles/268221/2013/01/real-estate-gifting-realized-outright-donations-and-bequests#sthash.fBfkpXOL.dpuf