Can I Use My Vacation Home to Make a Substantial Charitable Gift?

Question:  I would like to make a meaningful contribution to my alma mater – my 50 year reunion is coming up. I have also decided, reluctantly, that the time has come for me to part with the family vacation home in Maine that has meant so much to me and my late husband over the past 40 years. The kids and grandchildren have moved away and no longer use the property, nor do I, and the upkeep and taxes are expensive and worrisome.

Would it be possible to directly use my Maine property to make the gift to my college – rather than going through the ordeal of selling the property (and paying big capital gains taxes) and  then making a cash contribution?

– a 70-year old widow living in Newton, MA.

Answer: Yes! You could deed your property directly over to the college, and they would presumably sell the property to generate cash to be used by the college however you specify. One advantage to you in doing it this way is that you would totally avoid any capital gains tax that you would otherwise face if you sold the property yourself. Another advantage is that the college, not you, would be responsible for selling the property.  Yet another advantage for you would be that you would be entitled to an income tax deduction equal to the full appraised fair market value of your property.

All of this assumes, of course, that your college would be interested in receiving such a gift…

The good news is that more and more nonprofits, especially colleges and universities, are interested in accepting gifts of real estate, because they realize that gifts of cash and appreciated securities may continue to be hard to come by, and they are increasingly turning their attention to accepting other assets, especially real estate, as gifts.

If your college doesn’t want to take title to your gift property themselves, it’s also quite possible that you could work with a community foundation in the area that would consider accepting the gift property and using the proceeds from sale to establish a Donor Advised Fund, allowing you to recommend distributions from this Fund to go to your college.

Most non-profits in situations like this need to investigate the property before they commit to accepting it. This usually entails a routine title search, a building inspection, perhaps an environmental inspection, and consultations with local brokers about the likely price they could obtain through sale. Assuming everything checks out, the college – or another non-profit — would work with your attorney to arrange the deeding over of the property. As of that point, the responsibility for property taxes, utilities, maintenance, etc. would transfer to the non-profit.

Assuming your children are comfortable with this arrangement, you would want to consult with your lawyer and CPA. Then, assuming your college is interested, it would be your responsibility to obtain a qualified appraisal of the property, which you would use to substantiate your tax deduction.  This appraisal must be completed no sooner than 60 days before you make the gift, and no later than the day on which you file the tax return on which you claim the deduction. Working with your CPA and your appraiser, you would report the charitable contribution of your property on IRS Form 8283 (Non-Cash Charitable Contributions).  When the college sells the property, they would report the sales price to the IRS using Form 8282.

Let’s say, for example, that your appraisal establishes an estimated fair market value for the property of $450,000.  You would be entitled to a charitable contribution deduction of that entire amount, but you might have to spread it out over several years, depending on your income situation.  In any one year you can claim charitable contributions of up to 30% of your adjusted gross income. Any deduction not used in one year can be carried forward to the next year, for up to five carry-forward years.

Let’s say, then, that the College, after listing the property at $475,000, sells it a few months later for $425,000.  This doesn’t change the fact that your deduction is still based on your appraisal of $450,000.

It sounds like you are in the fortunate position to make an outright gift of the property to your college. But if you needed to generate some supplemental retirement income as part of disposing of the vacation home, you could do so either by donating the property to a charitable remainder trust (which would pay you income for life and then distribute what’s left in the trust to the college upon your death, or at some other specified time), or by donating the property in exchange for a charitable gift annuity from the college, which would lock in fixed payments to you for the rest of your life.

For some property owners like you, there is an interest in continuing to use the property for many more years, but there is also a desire to donate the property now so that the charity can sell it once the owner is no longer using the property. This arrangement, referred to as donating a property subject to a retained life estate, offers the advantage of triggering a substantial tax deduction now, and gives the donor the satisfaction of being recognized for making the gift now (as opposed to posthumous recognition), while at the same time allowing the owner and others to continue to use the property as they would have otherwise done.

There are a variety of other creative ways that someone in your position can dispose of a valuable property while meeting a range of retirement income, tax planning and sometimes conservation objectives. We are seeing more and more gifts of real estate as these techniques are becoming more widely understood.

For additional information about gifts of real estate by both individuals and family foundation, please visit www.bidwelladvisors.com or contact Dennis Bidwell at dbidwell@bidwelladvisors.com or 413-584-2732.