The Real Benefits of Donating Real Estate
by Greg Mattox
When most people think of gifts that are typically made to charity, they think of donations of cash or appreciated stock. Others may think of large estate gifts ultimately given through a last will and testament or living trust. A less well-known gift option is a gift of real estate, but as you will see, a gift of real estate can be one of the most beneficial forms of gifting for both the donor and charity. As an example, Eisenhower Medical Center’s first charitable gift was a gift of 80 acres of land for the main hospital campus in Rancho Mirage, given by Bob and Dolores Hope.
A gift of real estate can come in many forms, including a gift of land as was made to create Eisenhower Medical Center, investment property, or a personal home. Real estate can also be used to fund a charitable life-income gift, e.g., a charitable remainder trust or charitable gift annuity. Below are some of the benefits of making a charitable gift of real estate.
Outright Gift of Real Estate
When property owners have real estate that has significantly appreciated over the years, a gift of real estate can be a smart way to make a charitable gift because the owner can receive two tax benefits. First, the owner will receive a charitable deduction based on the fair market value of the property. This value is determined by an independent appraisal. Second, the donor will avoid paying the capital gains taxes on the property if the property is donated to charity. For some high-income earners who have held property for a significant period of time, the benefit of the tax deduction might be greater than the original purchase price of the property. Finally, another benefit to a gift of real estate is the ability for many property owners to simply their lives. Donors who decide to benefit a charity with real estate no longer have to manage the property—an attractive outcome for many owners who are retired—or pay the expense on the property, including property taxes and insurance.
Part-Gift and Part-Sale of Real Estate
An interesting variation of an outright gift of property is a partial gift of property and sale to a charity, which is called a charitable bargain sale by the IRS. This approach is helpful when the charity is interested in buying the property for its charitable programs and services. The charity, for example, may desire the property for an office, community center, or outreach program, etc. In this case, a property owner simply sells the property at a reduced amount and the difference between the value of the property (determined by an independent appraisal) and the purchase price is then treated as a tax deductible donation to the charity. This situation represents a clear win-win for the donor and charity.
Charitable Remainder Trust Funded with
A charitable remainder trust is a flexible wealth management and philanthropic tool that can be funded with real estate and can provide significant financial benefits to the property owner. From a tax perspective, a charitable remainder trust offers two primary benefits. First, the donor can sell the real estate asset held in the trust and will avoid paying all upfront state and federal capital gains taxes. As a result, the full proceeds from the sale of the property are in the trust, allowing the proceeds to grow tax free for the duration of the trust, which is usually for the life of the property owner or owners. Second, the donor will receive an immediate income tax deduction equivalent to the present day value of the charitable remainder that is calculated to be available after the passing of the beneficiary or beneficiaries.
From an income perspective, the trust is drafted to provide a payout rate annually to the beneficiary or beneficiaries. Depending on the age of the beneficiary or beneficiaries, most charitable remainder trusts are drafted to pay between 5% and 8% per year of the annual value of the trust. If an immediate tax deduction is not a priority or cannot be used, the property owner also has the option of increasing the payout rate substantially to tailor the tax benefits to their specific situation.
A special type of charitable remainder trust is typically used for real estate. This trust is described as a flip charitable remainder trust (“flip CRUT”), which will provide the beneficiary or beneficiaries the net income from the property before the sale and will then flip to an annual percentage payout (5% to 8%) of the trust assets each year. This ability to flip payouts from net income to a percentage payout is important because it helps decrease the possibility of interrupting the cash flow paid to a property owner.
Charitable remainder trusts also provide flexibility in providing guaranteed income to children or other families should the donors pass away prematurely.
Charitable Gift Annuity in Exchange for a
Gift of Real Estate
Primarily used for residential properties, a donor may also be interested in gifting a property directly to a charity in exchange for a charitable gift annuity. Typically, this option is only available with larger, more established charities. While a charitable gift annuity does not have the flexibility of a charitable remainder trust in terms of beneficiary planning, the financial benefits are similar to a charitable remainder trust, and establishing a charitable gift annuity is fairly straight forward.
A donor who gifts a home for a charitable gift annuity will avoid paying part of the capital gains taxes and defer the remaining capital gains taxes over his or her life. The donor will also receive an immediate tax deduction for the calculated present value remainder gift to the charity with the charitable gift annuity. These tax benefits can be very valuable. Finally, the donor will also enjoy partially tax-free income for a period of years. Annual income payouts for a real estate funded charitable gift annuities are often in the 4% to 6% range of the appraised value of the property.
As was the case for the initial founding of Eisenhower Medical Center with the gift of land by Bob and Dolores Hope, gifts of real estate, an often overlooked asset that can support charity, can have significant philanthropic and community benefits. Gifts of real estate can also have real financial benefits for a donor. These benefits include capital gains savings, income tax savings, and attractive income payouts in retirement. Donors interested in supporting charity with a gift of real estate have a number of gift options available to them, including an outright gift, partial gift and sale, the flexible charitable remainder trust, and the straight-forward charitable gift annuity. If you have appreciated real estate, consider the real benefits of gifting all or a portion of the property to charity before selling.
Greg Mattox is the Director of Major and Planned Gifts for Eisenhower Medical Center Foundation. Greg works with donors and advisors to establish estate gifts, charitable trusts, charitable gift annuities, and gifts of appreciated assets to benefit donors and Eisenhower. Greg is also a licensed California attorney. He lives in Palm Desert with his wife and two sons.