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Boulder Daily Camera
Making Money Matter
Enid Ablowitz
 

Gifts of Real Estate

By Enid M. Ablowitz

Real estate can be a forgotten, yet very effective asset to use when making a charitable gift.  As you consider your financial portfolio, look at the real estate you own to see if there is an opportunity to unlock the unused value and turn it into a generous donation.  In fact, you may even be able to convert the illiquid asset to provide income for yourself.

The first step is to evaluate each asset.

Scenario 1:  You own a parcel of unimproved land like a building lot or raw land that you are paying annual taxes on, but no longer intend to use. 

Scenario 2:  You own a vacation home, condo or a deeded timeshare free and clear, but you just don’t get there often enough to justify keeping it.

Scenario 3.  You own an income property, but you are tired of collecting rents and dealing with the repair and maintenance issues.

Scenario 4.  Your family home is now too large for your ‘empty nest.’

Scenario 5.  You are working through your estate plan and realize that your heirs are not interested in inheriting any of the assets in scenarios 1-4.

In each case, the equity values in the real estate are illiquid.  If the property is appreciated, selling the asset could trigger capital gains tax (except for the exclusion for your personal residence).

Let’s suppose you wanted to gift the asset in its entirety to the charity.  If the property is free and clear, a simple deed is all that is needed. You can avoid potential capital gains taxes and get the full market value of the real estate as a charitable deduction. You could also make a bequest through your will by specifying the property and the recipient non-profit.

There are more sophisticated transfer techniques such as a bargain sale or a retained life estate that can be used to give real estate assets as well.  In the case of a bargain sale, the property is sold to the charity below market value.  The donor receives cash and the charity can then sell at the higher price to realize the gift.  A retained life estate is used when a donor gives a personal residence to the organization but retains the right to continue living in it for the rest of his or her life.  Each of these methods has a practical consideration for the donor and may meet the donor’s needs and at the same time, unlock their intended gift.  There may be significant tax benefits as well.

Be sure to check with your legal advisor about the best gift asset and the proper transfer mechanism for you.  In addition, you should alert the charity early in the process, since many have real estate gift acceptance policies.

One interesting financial strategy is to give a real estate asset in return for an income stream.  In this case, you may want to give land or a vacation home, a duplex, or your too-large residence to the charity through a charitable remainder trust (CRT). When the property is sold, the proceeds remain in the trust which then provides you with an income for a period of years or for life.  The illiquid asset becomes liquid, you’ve unlocked the appreciation, and, in avoiding capital gains, the larger, tax free value goes into the trust.  If the CRT is a unitrust, the payout depends on a fixed percent of the changing value of the trust based on investment strategies.  If it is an annuity trust, the payout depends on a fixed percent of the initial value of the trust, regardless of the fluctuations in value. 

For example, suppose you owned a vacation condo for which you paid $75,000 and the market value is now $150,000.  Now let’s suppose you gave it to a qualified not-for profit through a charitable remainder annuity trust. The interest rate you are offered will depend on your age and the policies of the charity.  If the rate were to be 5%,  the property that may be costing you $1,500 a year in taxes and maintenance can now yield you a lifetime income of $7,500 per year and a charitable tax deduction too.  But best of all, you can make that gift you wanted to make and see its impact as the organization fulfills its mission.

If you want to give, you can find a way.  And sometimes by giving just the right asset, you solve some of your own financial puzzles too! 

You may contact Enid Ablowitz by email at enidablowitz@hotmail.com

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