How can my family foundation use real estate for tax-advantaged charitable giving?

Most of my work these days is with non-profit organizations seeking to increase the charitable contributions they receive in the form of real estate gifts of one sort or another. Such charities are seeking gifts of real estate because they have come to realize that, although more than 30% of the baby boomer wealth transfer that surrounds us is in real estate holdings, less than 3% of charitable giving is made through gifts of real estate. That means that much of the potential for donations to worthy causes is left untapped.

These engagements with non-profits often have me working with families and their advisors as they sort through the sometimes very challenging process of deciding when and how to part with properties that quite often have been in the family for some time. Though it’s always rewarding to help worthy non-profit organizations attract major real estate gifts to support their good work, the real joy comes in helping individuals and families to realize they have philanthropic capacity in their real estate holdings that they never imagined. It’s extremely satisfying to help families address multiple problems/opportunities at once: how to dispose of a property in as painless a fashion as possible; how to minimize or eliminate capital gains taxes and trigger useable charitable tax deductions; and how to make a charitable impact well beyond what they might ever have dreamed.

Customarily, when the time comes to dispose of a piece of real estate – a vacation home or second home that is no longer used the way it once was; an investment property that has become too time-consuming to manage; an inherited farm or ranch – property owners choose from a fairly narrow menu of options: list the property for sale and pay whatever capital gains taxes might be due; pass the property on to heirs whether they want it or not; or leave the property to charity by bequest.

Increasingly, I am finding families, sometimes stimulated by charities in their lives, and sometimes guided by a financial advisor, CPA or attorney, utilizing other options in the menu of property disposition alternatives. Here is an abbreviated list of charitable property disposition options, as they correspond to different motivating factors.

• Outright gift.  A surprising number of families have the capacity and the desire to simply deed over their property to a charity (or charities) of meaning to them. This is by far the simplest arrangement for all involved, generates the maximum possible charitable deduction, totally eliminates any possible exposure to capital gains tax, and provides the maximum charitable benefit to the non-profit.
• Life income arrangements. Some property owners are ready, however reluctantly, to part with an underutilized piece of real estate, but would prefer to realize a combination of charitable gift and income stream for life. This is typically done by working with a non-profit to establish a charitable remainder unitrust which becomes the recipient of the gifted property.  Because such an entity is tax-exempt, all capital gains exposure is avoided, meaning the entire value of the property (less brokerage and other expenses) is put to work, generating income for the income beneficiaries (for life or for a specified period of years) with the remainder of the trust proceeds ultimately passing to one or more charities. This is an excellent way to unlock the value of the real estate and simultaneously create an income stream, lower the tax implications of the transfer and have a positive impact on one or more favorite charities.Similar results can be accomplished by funding a charitable gift annuity with a piece of property.  In this case possible capital gains taxes are reduced and deferred, but not eliminated. Still, this may be an attractive way to dispose of property because the income recipient(s) are guaranteed a fixed income, based on the age(s) of the income beneficiary(ies). The gift annuity is a simple contract and the annuity payment is backed by the balance sheet of the issuing charity. There are no trustees or third parties involved and the arrangement is quite straight forward. Note, however, that non-profits considering such arrangements will often want payments from the annuity to be deferred one or more years to allow them adequate time to liquidate the property.

• Continued use of the property after donation. Some property owners wish to continue to use the property as they have, but would like to put in place now the arrangements for its donation.  By gifting a property subject to a retained life estate, property owners can continue using (or perhaps renting) the property as they have, and will continue to be responsible for taxes, utilities, and upkeep.  This arrangement gives the charity the ability to recognize the donors’ gift during their lifetimes, rather than after their deaths, as would be the case if they left the property by bequest.  And, unlike a bequest, the donors will receive a current charitable tax deduction which is actuarially determined.
• Part gift, part sale.  There are situations where an owner looking to dispose of a property would like to make a meaningful gift to a charity, while at the same time realizing some cash for travel, children’s weddings, health care, investment for retirement, etc. In such cases one of two solutions is often employed. When a bargain sale is used, the property owner sells the property to a charity at a discount price. The difference between the appraised value and the sales price is considered a charitable contribution. Capital gain is realized on a pro-rata basis.  In this situation, the charity front-ends cash for the purchase at the discounted price, then turns around and sells the property at market value. An alternative that accomplishes much the same thing is when a property owner donates a fractional interest in the property to a charity, claiming a charitable contribution deduction in doing so. The two parties then cooperate in selling the property, each emerging with a proportionate share of the net sales proceeds. In this instance the charity need not access acquisition funds.

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There are many tax-wise property disposition tools available to the planner seeking to accomplish whatever family objectives need addressing. Each of these tools, and others available too, can be adapted and combined to fit particular situations.   What all of these approaches have in common is the unlocking of wealth in the form of typically underutilized (and often underperforming) real estate and turning it into a combination of major (sometimes transformative) charitable giving, tax savings, and the relief of knowing that someone else (the charity involved) is now responsible for the expenses on the property, its marketing, and sale.

The growing interest in real estate gifts in the non-profit world, and the growing awareness by professional advisors of the versatility of these tools, assures that in the future a greater and greater share of real estate wealth will find its way to the charitable sector.