Top Three Ways to Make Charitable Gifts of Real Estate
While real estate represents 30% of privately held wealth in the United States, it accounts for less than 3% of all charitable gifts. Opportunities for significant tax benefits are often missed by donors who perceive a charitable gift of real estate to be an overwhelming process. However, real estate is often an ideal asset for charitable giving because long-term assets with the lowest adjusted cost basis and highest capital appreciation provide the greatest tax savings for the donor. Your clients may be overlooking a valuable charitable giving opportunity, and you are uniquely positioned to propose this opportunity to clients who own appreciated real estate.
Types of real estate that can be donated to charity include vacant land, residential property, commercial property, and agricultural land. The three primary vehicles for making gifts of real estate are outright gifts, charitable remainder unitrusts, and retained life estates.
Outright Gifts of Real Estate
Most gifts of real estate involve property that has been held long-term by the donor. For outright gifts of real estate, the donor is generally eligible to deduct the fair market value of the property, up to 30% of adjusted gross income when donated to a qualified public charity, with a five-year carry forward. Additionally, the donor can avoid the capital gains taxes that would otherwise be incurred if he or she sold the property. The multiple tax benefits make an outright gift of real estate a smarter decision than selling the property, incurring capital gains taxes, and then donating the proceeds from the sale to charity. Additionally, in many instances a donor can gift an undivided interest in the property, usually a percentage of the entire asset, to charity while retaining an interest, thus allowing the donor to keep a portion of the sale proceeds.
Charitable Remainder Trusts
A gift of appreciated property can also be used to create a charitable remainder trust, which will provide the donor an annual income for life. To establish a charitable remainder trust funded with real estate, the donor transfers the property or an undivided interest in the property to a flip charitable remainder unitrust. The donor claims a charitable income tax deduction based on a qualified appraisal of the property and bypasses the capital gains tax that he would have incurred had he sold the property himself. The trustee markets the property, and once the property is sold, the flip charitable remainder unitrust converts to a standard charitable remainder unitrust. The proceeds from the sale of the property are invested and yield annual income for the donor for the rest of his life. The annual payment will vary based on the value of the trust. When the trust ends, the remaining assets in the trust will be transferred to the charity or charities designated by the donor. The donor can name multiple charities as remainder beneficiaries. For donors who wish to support the University of Florida, the UF Foundation can serve as trustee of a charitable remainder unitrust provided that at least half of the remainder is designated to support programs at UF.
Retained Life Estates
The third most common vehicle for a charitable gift of real estate is a retained life estate, where the donor irrevocably deeds property to a charity while retaining the right to live in it for the rest of her life. It is an opportunity to continue living in or using the home, vacation home or farm while also establishing a gift now, and to enjoy the benefits, including current tax savings, that usually accompany only lifetime charitable gifts. A retained life estate arrangement can generate a sizable income tax deduction in the year the gift is established. At the end of the retained life estate term (usually the donor’s lifetime or joint lifetimes), the property goes to the charitable recipient. A retained life estate agreement also allows the donor to use the property productively or rent it to others during her lifetime.
For donors who are interested in using real estate to make a gift to the University of Florida, we accept gifts of real estate valued at $30,000 and above. We have a real estate professional on staff who can assess the property to determine its likely value and marketability. Once we have determined the property meets our acceptance policy and we have completed an environmental assessment, the donor must obtain a qualified appraisal in order to receive a charitable tax deduction. Once all due diligence has been completed, the UF Foundation’s legal counsel will coordinate with the donor and his or her legal advisors to arrange the transfer of title. While the donor’s legal advisors will prepare the deed and any related documents, UFF’s legal counsel will assist by providing draft language for the documents, particularly language with respect to retained life estates and charitable remainder trusts. Our Office of Gift Planning will work with the donor and/or his or her advisors throughout the process to ensure a seamless experience. Please contact us at your convenience to learn more about how we can assist your clients with accomplishing their philanthropic goals while maximizing their tax benefits through a charitable gift of real estate.
 Bryan Clontz, Charitable Gifts of Noncash Assets (The American College Press, 2017), 1.5