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Innovations in Giving: Using Real Estate & Charitable Trusts Together
By Eric Kinaitis
A recent case study featured two topics that many never consider as being part of a charitable giving solution: real estate and a charitable trust combined together.
For definition, a charitable trust is a means by which a person can leave assets from their estate for charitable and tax saving purposes. There are many variations of charitable trusts to consider. The case study positioned a married couple as interested donors who wanted to achieve what might normally be considered opposing goals: using the value of an asset to support both their charitable wishes AND provide financial support to their heirs.
Here is how this can work through the concept of a double charitable trust. In the case study, a commercial building was transferred into a charitable lead trust (CLT) . The income generated from that commercial building (via rents paid by tenants) was distributed as income to charities of the trustor’s choice.
Once the end of the time span of the charitable trust is reached, the building can then be transferred into multiple charitable remainder unitrusts (CRUT) that can pay an income stream to the heirs of the original trustor. Once the end of the time span of the charitable remainder unitrust is reached, the value of the commercial building can then be donated into a donor advised fund to continue to perpetuate a charitable legacy on behalf of the original trustor who first transferred the commercial building into the CLT.
In fact, a donor advised fund (DAF) can be a partner throughout the entire process. A donor can use the same DAF as the recipient of the income stream from the CLT and also serve as the recipient of the remainder interest once the CRUTs reach the end of their timespan. The presence of the donor advised fund provides the original donor and their family the greatest flexibility available.
Of benefit to a financial advisor, the presence of the donor advised fund allows the advisor to bring an asset under management that they would never have access to before; in this case, the value of the commercial building.
Many people enjoy supporting the charitable causes that are important to them. However, they often do it with direct cash payments on an after-tax basis. A better, tax-efficient alternative for many may be to leverage the value of an illiquid asset like real estate to support a good cause.
The owner of the real estate should consider the following questions:
- Have they been enjoying the benefits of 1031 exchanges?
- Are they not currently using this property?
- Does the property fail to meet their investment objectives (a rental property with ongoing vacancy) or social objectives (a family vacation home that is no longer used as frequently)?
- Would a large capital gains tax be due if they sold this property?
If the answer is “yes” to any combination of these questions, the property may be a good candidate for gifting.
Donating a Property through a Donor Advised Fund
Donor advised funds (DAF) are charitable giving vehicles that are established by a sponsoring public charity, which make grants to other charitable organizations based upon recommendations from the donor. By donating appreciated real estate to a donor advised fund, the owner can earn generous tax benefits, support their favorite causes, and free up time for other pursuits.
Better Vision for Children (BVC) is a public charity that enables donors to create a donor advised fund. BVC administers the fund on behalf of the donor. The donor can then recommend grants to qualified nonprofit organizations on their own timetable. The donor’s financial advisor can remain involved in managing the investment dollars that reside in the BVC account.
How It Works
After a donor establishes a donor advised fund with AEF, the donor irrevocably transfers title of the debt-free property to the fund. The donor may be eligible for an immediate federal tax deduction equal to the Fair Market Value (FMV) of the property, up to 30% of the adjusted gross income (AGI). If the FMV of the donation is greater than 30% of AGI, the excess can be carried forward for five years. This compares very favorably to donations made to a private foundation, which are generally deductible at cost basis.
After title to the property has been transferred to the fund, BVC will work with the donor and their financial advisor to sell the property. Once a sale has been completed, the cash proceeds will be available for the donor to donate through their DAF.
By choosing this device, the donor utilizes a tax-smart tool to support the good causes important to them and implement donations on a timetable that fits their schedule and interests.
Contact us or call at 714-637-4034 with any further questions.
Why donate Real Estate?
Of course, most Americans do not have a large real estate portfolio. But many can enjoy significant financial benefits and provide a charitable benefit to the community at the same time.
One of the advantages to the donor is that the size of the tax deduction is determined by the current market value of the property, as opposed to the cost of the property when it was purchased (Moreover, by donating a property instead of selling it outright, donors may avoid paying brokers’ fees.)
In many cases, if one takes into consideration ongoing property taxes, maintenance costs, income taxes–or if the property is sold, the cost of legal fees, brokerage fees, estate taxes, inheritance taxes and capital gains taxes–it is often financially preferable to donate properties to charities. It also saves heirs the trouble of trying to divvy up the gains if the will is potentially contentious or inequitable. Sometimes there are intangible benefits as well.
Real Estate donations can provide you with highly beneficial tax results and allow you to achieve significant and important charitable goals that benefit those in need.
A donation of real estate to BVC on behalf of our charities can reduce your tax burden and provide you with the benefit of savings that comes from relief of the maintenance of your property. You can also avoid capital gains tax on highly appreciated properties with your charitable donation of real estate.
You can significantly reduce your legal and tax liabilities on the properties you donate and more efficiently attain personal financial goals white also supporting our charities.
Real Estate – Who Should Donate?
Those that want help improve the communities in which they live.
The benefits of an IRS tax deduction are quite an attractive prospect. And you can make a positive difference for others less fortunate as well.
Businesses with properties that are idle, lacking positive cash flow and are assets that will never reach any useable potential.
Fully depreciated properties that do not serve the financial interests of the donor.
Uninsured catastrophes that are more a detriment financially to continue to maintain.
Real Estate Donation FAQ – Donate Easily
How complicated and how long will the charitable donation process take?
The donation process varies from property to property. There are many factors that can affect this process. Among these are a number of encumbrances ranging from civil liens to unpaid property taxes. Every effort is made to ensure that this is as simple and timely as possible from beginning to the final transfer of property title.
How will I know if Helping Hands of America is willing to accept my charitable donation?
Upon the receipt of all documents and information, BVC will be able to determine if property can be received as a charitable donation.
Who pays the expenses?
All expenses incurred during the process are generally accepted as the responsibility of the donor. There are exceptions to this and under certain circumstances; an agreement is made to share the expense of the acquisition of your charitable donation. (I.e. Title insurance, property insurance, environmental testing, probate or other issues and costs)
What costs can I expect to incur during the donation process?
Generally, the donor is responsible for all of the regular costs associated with the property until the acquisition of the property by BVC. This may include, but not be limited to all taxes, bills and mortgages. There are of course exceptions to this. Every donation is considered on a case-by-case basis.
What if I am missing important documentation?
Because closing the transaction usually takes place through a title company or another agent for the donor, such as an attorney, a title search will be performed so that all the necessary paperwork will be procured in order to proceed with the acquisition of the donation.
At what point will my responsibility to the Real Property end?
The donor’s responsibility stops at the end of the acquisition process.
Do I need to be present at the time of the closing?
No, at the time of the closing, all necessary paperwork has already been completed. The actual closing itself will simply be a paper transaction that occurs once all legal requirements for the transfer of your charitable donation have been completed. If there are any additional issues that arise, usually in regards to the title search, all parties involved shall be properly notified. Usually if this happens, it is just a simple matter of signing additional documents and the issues can be resolved before the closing.
Real Estate Donation Tax Benefits – IRS Tax
Deduction Donated Property
A Real Estate Donation, whether vacant land, industrial, residential, land contracts, commercial property or timeshare, provides you with a great way to enjoy what many consider an impressive tax deduction. If your real property asset has grown in value, or unfortunately turned into a nonproducing property in your portfolio, it may be the time to consider a real estate donation.
Real estate donations make good sense for both individuals and corporate donors. The equity from your real estate donation helps us continue to benefit the many commendable causes we support. BVC is here to provide you with the know-how necessary to conduct a real estate donation that optimizes the benefits for both you, the donor and the charities we serve.
What Can a Real Estate Tax Deduction Do For You?
These rules may apply if the donated real property is owned in your own name, with your spouse or other persons. (Please check with your tax professional):
If you have held the property for more than one year, it is classified as long-term capital gain property.
You can deduct the full fair market value of the donated property. Your charitable contribution deduction is limited to various percentages of your adjusted gross income. Excess contribution value may be carried forward for up to five years. If the property has been depreciated, the fair market value must be reduced by its accumulated depreciation through the date of contribution.
Fair Market Value is most commonly determined by an independent appraisal.
If you choose to deduct your cost basis of the donated property you are allowed a deduction of fifty percent (50.00%) of your adjusted gross
Income (Please check with your tax professional).
Excesses can be carried forward up to five years. Which method you choose to follow is dependent on the cost basis in the property donated, your tax bracket, the age and health of the donor and whether you plan to make future contributions (Please check with your tax professional).