A Gift of Real Estate
With a gift of real estate, donors have several options for making tax-efficient gifts using property they may otherwise be inclined to sell.
OPTION 1—an outright gift of appreciated property
This can be a straightforward and tax-wise way for a client to meet multiple planning goals. It works like this:
- The donor obtains a qualified appraisal of the property. (This is necessary to establish the property’s fair market value.)
- The donor gives the appreciated property to the UMass Foundation, for the benefit of UMass Law, within 60 days of the appraisal.
- The gift qualifies for an income tax charitable deduction (if the donor itemizes) for the property’s full fair market value. The donor’s deduction in any one tax year is limited to 30% of adjusted gross income, but any unused deduction amount can be carried over for up to five years.
- The donor will owe no capital gains tax on the property (as they would have with a sale).
What about mortgaged property?
Mortgaged property tends to be a problematic gift asset. Usually, the best solution is for the donor to pay off the mortgage before donating the property. If this is your client’s situation, reach out to us to discuss the best way to proceed.
OPTION 2—a bargain sale
Clients who are ready to dispose of a property but aren’t in a position to give it away may find this option useful. A bargain sale is part gift and part sale and, therefore, provides both a current income tax deduction and proceeds from the sale of the property. It works like this:
- The donor sells the property to the UMass Foundation, for the benefit of UMass Law, for less than its full fair market value—for example, a donor might sell the Foundation a property appraised at $500,000 for only $200,000.
- In the above scenario, the Foundation would pay the donor the $200,000 sale price, but the donor would also make a $300,000 gift to the UMass Foundation, for the benefit of UMass Law.
- The gift portion qualifies for an income tax charitable deduction.
- The donor owes no capital gains tax on the gift portion.
OPTION 3—a gift of a remainder interest
A client who could use an income tax deduction now but would like to continue to use and/or occupy the personal residence or farm for life should consider this option. It works like this:
- The donor enters into an arrangement with the UMass Foundation, for the benefit of UMass Law, under which the property will be irrevocably transferred to the Foundation at the time of the donor’s death.
- The donor retains a “life estate” that ensures the right to live on or use the property throughout the donor’s lifetime.
- Even though the gift doesn’t actually take place until later, because it is irrevocable, the gift qualifies for an immediate income tax deduction for the discounted present value of our future interest in the property (essentially, the value of the land and improvements reduced by the value of the donor’s lifetime use of the property).
- After making a gift of a remainder interest, if the property is no longer needed, the donor may choose to donate the life estate and receive an additional charitable deduction at that point. (Note that there will be issues with this option if it appears to the IRS that the donor planned to do this all along.)
OPTION 4—a gift to establish a charitable remainder trust
A client who holds a property they no longer want to own and who is interested in establishing an income stream to supplement other forms of retirement income should consider this option. It works like this:
- The donor uses the property to establish a charitable remainder trust (CRT).
- The trustee (which could be the UMass Foundation) is able to sell the property without incurring any capital gains tax.
- The trustee can then invest the sale proceeds and use the money to make regular income payments to the donor and/or the donor’s named income beneficiaries for life or for a stated term of years.
- At the end of the trust term, the remaining trust assets will pass to the UMass Foundation, for the benefit of UMass Law.
Evaluate the fit.
A gift of real estate may be a particularly good option for those who:
- Own appreciated property (residential, commercial, or undeveloped land) they no longer wish to use or maintain
- Would like to get rid of their property in a way that reduces or even eliminates the payment of any capital gains tax on the appreciation
- Could use a charitable deduction
- Want to use their property to establish an income stream
- Are willing to put in a bit more time and effort in order to use this asset to meet both financial and charitable goals in a tax-efficient manner
See how it works.
Example one. Scott and Robin’s vacation cottage, once a family joy, has become a burden. They thought about selling the property and giving the proceeds to the UMass Foundation, for the benefit of UMass Law, but when they learned that we would accept the cottage as an outright gift, it was an ideal solution. Scott and Robin itemized in order to receive a tax deduction (with a qualified appraisal), eliminated the cost and hassle of a sale, and owed no capital gains tax on the property’s significant appreciation. The UMass Foundation then sold the cottage and put the full amount of the proceeds to work supporting UMass Law.
Example two. Maria paid $100,000 for land that is now worth $500,000—property she no longer wants. After discussions with us and her attorney, Maria decides to sell it to the UMass Foundation, for the benefit of UMass Law, for $300,000. She receives some much-needed cash and makes a gift of the remaining $200,000. No capital gains tax is due on the gift portion, and she qualifies for a charitable income tax deduction for the full $200,000 gift amount.
Consider the timing.
If a client wants to qualify for a charitable deduction this year, they should plan to begin the process no later than early November, as real estate gifts can take some time to complete.
The UMass Dartmouth Advancement Team can help.
We are happy to discuss the details of a client’s planned real estate gift. We will ensure that the gift property is marketable and that we are able to accept it. If the property is a good fit, we can work with you and your client to:
- Explore the options mentioned here, along with other gift ideas (for example, gifts of oil or water rights, qualified conservation contributions, funding for a donor-advised fund, etc.)
- Ensure that your client’s gift meets all legal requirements (failing to meet all legal requirements can result in the loss of important tax benefits)
Keep in mind that we will need to conduct a title search and property inspection, and the donor will need to obtain a qualified appraisal if they wish to claim a charitable income tax deduction for the gift.