minnesota real estate foundation 2 opportunities & pitfalls of real estate gifts jerome l...
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Minnesota Real Estate Foundation
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Opportunities & Pitfalls of Real Estate Gifts
Jerome L McCarter, CPA
Minnesota Planned Giving ConferenceNovember 4, 2009
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Why Real Estate? Significant asset holding of many individuals. Wealthiest donors
frequently own multiple properties.
Asset class that has shown significant price appreciation, particularly for donor prospects age 65 and older.
Needed by many non profits to carry out their mission.
Opportunity for significant tax savings for the donor:
• Charitable tax deduction at fair market value.
• Avoid capital gains tax upon sale of the property.
Can be used effectively with planned giving vehicles such as Charitable Remainder Trusts, Charitable Lead Trusts, and Charitable Annuities.
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Real estate provides a viable charitable giving opportunity
Real estate comprises over 40% of the net worth of individuals in the U.S. Estimated at $25-$30 trillion of individual’s net worth.
Immediate tax deduction at appraised value, donor doesn’t have to wait for property to sell.
Real estate gifting allows the donor to reach charitable giving levels they may not have previously considered possible.
Real estate gifting can reduce capital gains, income taxes, and estate taxes.
Relieves the donor of potential property management headaches.
Minnesota Real Estate Foundation
…but it does present challenges.
Real estate gifting is not simple.
Real estate gifting is not “top of mind”, comprising only 2% of charitable contributions in U.S.
Not all real estate can be gifted.
Real estate is not easily divisible.
Real estate requires special skills to evaluate, time to liquidate, and has a risk associated with holding and liquidating.
Debt financed real estate may create UBTI for the donee charity.
Reverse mortgage option eliminated for donor.
Uncertain hold and carry period.
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Minnesota Real Estate Foundation
Types Of Real Estate Suitable For Gifting
Raw Land
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Minnesota Real Estate Foundation
Types Of Real Estate Suitable For Gifting
Personal Residence
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Minnesota Real Estate Foundation
Types Of Real Estate Suitable For Gifting
Vacation Home/ Recreational Property
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Minnesota Real Estate Foundation
Types Of Real Estate Suitable For Gifting
Farm Land
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Minnesota Real Estate Foundation
Types Of Real Estate Suitable For Gifting
Residential Rental Property
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Minnesota Real Estate Foundation
Types Of Real Estate Suitable For Gifting
Commercial Building
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Minnesota Real Estate Foundation
Types Of Real Estate Interests Gifted
Complete Interest
Remainder Interest
Tenants in Common Interest
Time Share Interest
Foreign Trust Interest
Partnership or LLC Interests (Real Estate Entities)
Corporate Interests (Real Estate Entity)
Real Estate Investment Trust Interest
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Minnesota Real Estate Foundation
Donor Real Estate Gifting Options
Gift Sale Proceeds To One Or More Charities
Gift Sale Proceeds To A Donor Advised Fund At A Community Foundation
Gift Sale Proceeds To Purchase A Charitable Annuity
Gift Sale Proceeds To Fund A Charitable Remainder Trust
Gift OF A Personal Residence Or A Second Home And Retain A Life Estate
Gifts Passing Through A Will Or Bequest
Gifts Of Real Property To A Charitable Lead Trust
Conservation Easements
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Minnesota Real Estate Foundation
Outright Gift Example
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Minnesota Real Estate Foundation
Case Study
Donor owns a 24 unit apartment complex with an original cost basis of $100,000 for the land and $1,000,000 for the building.
The building has been depreciated on a straight line basis to $200,000.
The fair market value of the property is $1,350,000.
Donor is in a 42% state and Federal tax bracket for ordinary income and 22% for long term capital gains. Unrecaptured section 1250 gain is taxed at a rate of 32% state and Federal.
Donor’s Adjusted Gross Income is sufficient to fully utilize a $1,350,000 charitable gift of appreciated real estate. (average $750,000 per year).
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Minnesota Real Estate Foundation
Case Study Outright Gift of Property-Net Cost To The Donor
Fair market value of the gift$1,350,000
Less: Income taxes on the long term capital gain @ 22% ( 55,000)
Less: Income taxes on the unrecaptured 1250 gain @ 32% ( 256,000)
Net cash available after tax on gain on sale $ 1,039,000
Less: Income tax savings on charitable gift ( 567,000)
Net Cost To Donor $ 472,000
Percentage of gift subsidized by tax savings65% 16
Minnesota Real Estate Foundation
Charitable Remainder Trust Example
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Case Study
Charity
Gift of Property•$1,000,000 Property•$100,000 Basis
Benefit to Donor•$371,750 income tax deduction•Avoid capital gains on $900,000 ($198,000 savings)•$50,000 in estimated first-year income
Remainder to Charity
$1,973,587
Unitrust
5%
Minnesota Real Estate Foundation
Case Study
A local professional advisor has a 65 year old client with undeveloped real estate worth $1,000,000 and a cost basis of $100,000.
The donor transfers the real estate to a Charitable Remainder Unitrust (5%). Assume the property sells during the year of the gift.
The donor receives an income tax deduction of $371,750, pays no capital gains taxes when the property is sold (a savings of $198,000), and receives an annual income stream in excess of $50,000 over the remainder of their life (assumed to be another 23 years).
Based on donor’s life expectancy and assuming the trust corpus is invested at 8% over the term of the trust, the remainder trust corpus of $1,973,587 will be transferred to charity upon the donor’s death.
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Keys Areas of Concern with Gifts of Real Estate
Liability to the charitable organization (environmental)
Holding/carrying costs
Zoning restrictions, easements, and other limitations
Debt on property
Marketing/selling property
Future considerations (rezoning, assessments)
Donor relations nightmare
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Procedures for Accepting Gifts of Real Estate
Authority (Two officers generally required to accept a gift)
Evaluation (required pre-acceptance procedures)
Responsibilities of Donor
Marketing and Sale of Real Estate
Gifts by Bequests
What the Donee Charity Should Not do
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Evaluation of Gifts
Property inquiry form
Liens, mortgages and encumbrances
Field evaluation
Preliminary market evaluation
Expense budgets (best case, likely case, worst case)
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Responsibilities of the Donor
Complete property inquiry form
Provide an environmental audit if deemed necessary
Obtain a qualified appraisal
Provide evidence of title, title insurance
Prepare a warrantee deed
Reach agreement on responsibility for carrying costs
Sign indemnification agreement
Sign a contribution agreement
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Marketing and Sale of Real Estate
Marketing and sales plan developed with donor. Generally, arrangements made through a qualified real estate agent.
Initial sale price of the property will be the appraised price.
Sale reported on the IRS Form 8282.
Charity must control the process.
Always use legal counsel.
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Gifts by Bequests
Charities will attempt to follow the same due diligence as they use with an outright gift during the donor’s lifetime.
Real estate bequests may be refused.
Donors are encouraged to talk with the charity prior to naming them in their will or estate plan. Not all charities accept real estate gifts.
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What the Charity Should Not Do
Pay for legal or other services, especially the appraisal.
Establish or corroborate the value of a property for income tax purposes.
Never accept a gift with an appraised value far in excess of fair market value. No charity should ever be associated with a transaction it knows or suspects is fraudulent.
Except in extraordinary circumstances, remove or assume debt of a donated piece of real estate.
Accept a gift without a complete and through understanding of the risks associated with the property.
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Questions and Answers
For further information please contact:
Steve Joul, Mike Burton or Jerry McCarter
Minnesota Real Estate Foundation101 S. Seventh Ave., Suite 100
St. Cloud MN 56301320-253-438877-253-4380
www.RealEstateGiving.org