How Real Estate Can Fit in a Client’s Charitable Giving Plan

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Contributing non-cash assets to charity can be a smarter way for clients to support the causes they care about. In addition to publicly traded stock, IPO shares and restricted stock, clients can donate real estate assets to charity to maximize their philanthropic impact and minimize taxes. Clients who donate appreciated assets may enjoy a current year tax deduction and potentially eliminate capital gains tax liability on the sale of the asset while allowing the charities they support to receive the most money possible.

You may have clients with a real estate asset—a piece of raw land, an investment property or a vacation home—that has been held for a long period of time and could create significant capital gains taxes when sold. If your clients donate such assets to a public charity (including a donor-advised fund account), they can take a full, fair market value income tax deduction for the donation while potentially eliminating capital gains tax liability on the sale of real estate. Contributions of similar assets to a private foundation would generally be deductible at the lower of cost basis or market value.

If your clients are interested in donating real estate to charity, these are some important considerations:

  • Real estate interests are generally appropriate to give to charity when a sale will enable the charity to convert the illiquid interest into cash. It makes the most sense for clients to donate real estate that meets the following criteria:
    • The property has been held for more than a year and has appreciated significantly.
    • The property is marketable and relatively easy and cost-effective to liquidate.
    • The property is generally debt-free. (If there is debt on the property, the contribution might be treated as a bargain sale to the charity, and your client may be liable for certain taxes, e.g., capital gains.)
    • Your client is willing to transfer the property irrevocably to the charity or donor-advised fund, which will negotiate the sale price and control the sale, often using an experienced intermediary.
  • If a sale is expected, the terms of the sale should still be under negotiation. The documentation must not have proceeded to the point at which the IRS would consider it a prearranged sale. That could result in your client bearing the tax liability for any gain on the sale.
  • These criteria most often apply to donations of a primary or secondary home or other residential property held for some time. Commercial real estate may also be donated under certain circumstances. Such gifts involve additional legal and tax considerations.
  • Contributions of real estate to a charity or donor-advised fund account are generally deductible at fair market value—as determined by an independent qualified appraiser—on the date of contribution, whereas contributions of real estate to a private foundation are generally deductible at the lower of cost basis or market value.

Case Study—Contribution of a Real Estate Asset

A New Hampshire vacation property worth $1,000,000 has been rented over the years with a tax basis of $100,000. The property is owned by a Living Revocable Trust, with no associated debt. A client who is very charitably inclined and wants to involve family across the generations seeks advice from an advisor on donating the property.

This is the fourth article in a series on donating non-cash assets to charity. For more information on this topic, see “Why Your Clients’ Investments, Not Cash, Make the Best Charitable Gifts,” as well as “Charitable Tax Planning Opportunity: Donate Appreciated Stock to Charity,” and “Philanthropy Opportunity for Executives: Donate IPO Shares and Restricted Stock.” Visit schwabcharitable.org for additional ways to help clients have more impact with their charitable giving while maximizing their tax benefits.

*Qualified appraisal by qualified appraiser received prior to sale† Hypothetical case study, for illustrative purposes only. Assumes cost basis of $100,000, that the investment has been held for more than a year and that all realized gains are subject to the 20% federal long-term capital gains tax rate plus the 3.8% Medicare net investment income surtax. Does not take into account any state or local taxes.

‡Gifts to public charities of real property are typically deductible at fair market value as determined by a qualified appraisal, obtained by the donor. The allowable deduction was based on the qualified appraisal, and assumes no debt associated with the property. The example assumes full deductibility (gifts to a public charity of real property held for more than one year are generally limited to 30% of AGI with a 5-year carryover of unused amount).

§Assumes donor is subject to the maximum 39.6% federal tax and does not account for state or local taxes. Certain federal income tax deductions, including the charitable contribution, are available only to taxpayers who itemize deductions, and may be subject to reduction for taxpayers with adjusted gross income (AGI) above certain levels. In addition, deductions for charitable contributions may be limited based on the type of property donated, the type of charity, and the donor's AGI.

© Schwab Charitable

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