by Kathryn Holding
For many donors, the most significant part of their net worth is real estate. As is the case with gifts of other long-term capital gains assets, real estate can be a very tax-efficient asset to use for charitable gifts. Because each property is unique, including it in charitable giving requires due diligence and proper structuring.
Generally, the best property for a donor to use as a charitable contribution is unencumbered real property that has been held for longer than one year. While a sale of real estate will trigger income for the owner (and capital gains taxes), if the owner donates the real estate to NCCF, he or she may avoid capital gains taxes and be eligible for a charitable tax deduction of the fair market value of the property.
A donor’s potential charitable tax deduction for a gift of real property may be calculated either based on the fair market value of the property or the cost basis, depending upon an assessment of two factors: first, whether the property is considered a ‘capital asset’ and second, whether the property is a long- or short-term capital gain asset.
For the donor to utilize the property’s fair market value for their charitable deduction, the property must:
If the property does not qualify as a capital asset or is classified as a short-term capital gain asset, the donor’s charitable deduction is limited to the cost basis of the property as opposed to the fair market value.
Generally, the donor's charitable deduction for gifts of appreciated property to a public charity like NCCF is limited to 30% of the donor's adjusted gross income (AGI), with a potential carry forward up to five additional years. Although the donor is limited to taking the entire charitable deduction in year one, the five-year carry-forward gives the donor the opportunity to take the entire amount spread out up to six years. (Note: The same gift to a private foundation gets the lesser of fair market value or adjusted cost basis, up to 20 percent of AGI, making giving to a DAF at NCCF a much more appealing option.)
Finally, the donor may elect to deduct the cost basis of appreciated property at 50% of his or her AGI. This is a helpful option for a donor who desires to make a large gift of real estate that has a high basis. The higher AGI deduction limitation may allow the donor to take the entire deduction in the year of the gift, rather than carrying it forward. However, if the donor elects to deduct at cost basis, all other appreciated property gifts and carry forwards must also be deducted at cost basis.
Special Note: While federal Coronavirus legislation increased the deduction limitation for cash gifts in 2021 to 100% of the donor's AGI, there is no change in the deduction limitation for gifts of non-cash assets.
Donors who make real estate gifts must file an IRS Form 8283 with their tax return, must obtain a contemporaneous written acknowledgment from the nonprofit for the charitable contribution, and if the property is valued in excess of $500,000, must attach a qualified appraisal to the tax return.
In general, the IRS requires a qualified appraisal for gifts of non-cash assets that exceed a value of $5,000. To be considered a qualified appraisal, it must not be performed earlier than 60 days prior to the date of the transfer and must be obtained prior to the due date, including any extensions, of the tax return on which the charitable deduction is claimed. If the property is valued in excess of $500,000, the donor is required to attach the qualified appraisal to the tax return for the year of the gift along with Form 8283. A qualified appraisal is also used to determine the fair market value (FMV) of the gifted real estate. It is the generally the responsibility of the donor to obtain a qualified appraisal.
Is your client in the position to donate a piece of real estate to NCCF to start or add to an existing fund?
Here are some things to consider:
The NCCF legal, finance and development teams are here to work with you and your clients to ensure the gift acceptance process flows smoothly and seamlessly.
When contemplating his charitable legacy, CPA Scott Shackleton had always planned to start an endowment at NCCF with a gift through his estate. However, a strong real estate market led Mr. Shackleton to determine it would be advantageous to donate rental property he owned now, allowing him to take a significant tax deduction and enjoy giving from a donor advised fund during his lifetime. Here’s our conversation with Mr. Shackleton about his experience transforming a Carolina Beach condo into charitable assets:
NCCF: How did you approach your charitable giving? Did you have a plan for what type of gift you wanted to make or when you wanted to make it?
Shackleton: My initial plan was to establish a ‘shell’ endowment fund to receive assets after I died, an estate planning tool that would allow my children the opportunity to advise grants to nonprofits and introduce them to philanthropy after I am gone. Then, I thought through the benefits of making a gift of appreciated real estate to start the fund in a tax-advantaged way while I’m still alive, and decided it was a step I wanted to take to get the fund started. I decided to move forward with starting the DAF during my lifetime, still with the goal of eventually involve my kids in advising grants.
NCCF: How did it benefit you to make a gift of real estate?
Shackleton: I have to start out by saying that although I'm a CPA, I am not giving tax advice to others. Everyone needs to consult their own CPA.
My condo had a very low tax basis for various technical reasons and was worth significantly more than my basis. Had I sold it, I would have had to pay a large amount in tax, say roughly $100,000 on a $300,000 condo. If I had sold the condo and paid the capital gains tax, I would have only had $200,000 to add to my donor advised fund. However, by using NCCF, I could donate the condo and avoid paying the capital gains tax, plus get a tax deduction of the fair market value. My income is such that it will take about three years for me to use up a portion of that deduction each year. Now, my donor advised fund with NCCF has the full $300,000, allowing me to grant more to nonprofits every year than if I had sold it first. I’ve shifted my charitable giving from my regular budget to the donor advised fund, and for several year I pay less in income tax as a result of the gift.
Anyone with appreciated real estate who plans to give money to charity, should ask their CPA about this approach. It was truly a win-win for me. It allowed me to pay far less in taxes and give more to charities that are doing really good work in the community and world. I think being strategic is important, especially when it comes to money for the good of the community.
NCCF: What was your experience like to donate the condo to NCCF?
Shackleton: It was a great experience. Everyone worked hard to communicate clearly and promptly to make sure there were no "hitches" or last-minute surprises. We set a date to do the transfer far in advance which I think helped. There was some paperwork to sign. I had to get an appraisal which set my tax deduction amount, and then the eventual sale price set the amount in my donor advised fund. Slightly over a year later, I was able to begin making grants. It was easier than if I had sold the property myself because NCCF took care of the listing with a realtor, etc. I have recommended NCCF to several friends, and I know at least one family that has set up an endowment fund.
If you’re interested in exploring a gift of real estate or other asset for your client, contact our Development Team to schedule a no-obligation consultation.
NCCF does not provide tax or legal advice. The information contained herein is for educational purposes and is not intended to be a substitute for individualized tax, legal, or investment advice.