Blog

How to Protect Your Clients’ Real Estate Gifts

When it comes to charitable giving, one of the most impactful options that you can offer clients is gifting of real estate. This kind of gift has many tax benefits, but when they’re directed to a fund at the Athens Area Community Foundation, the benefits are amplified further, creating a win-win scenario for both the donor and the community.

However, these gifts also require careful planning and attention to detail to ensure everyone is protected. You’ll need to comply with tax laws, take a number of legal precautions, and walk your client through each step – and that’s where the Community Foundation can help.

Why Charitable Real Estate Gifts?

Donating real estate to charity has become more popular in recent years, leaving attorneys, accountants, and financial advisors in a position to help communities and charitable causes harness this newfound support.

Like other long-term capital assets, real estate gifts can be very tax-efficient, especially when given to a fund at the Community Foundation. The biggest benefit is that clients are typically eligible for a charitable deduction based on the fair market value of the property. And because the Community Foundation is a public charity, when the property is sold, the proceeds are directed into the fund without incurring capital gains tax.

Ensuring a Successful Real Estate Gift

While the benefits are clear, the process of donating real estate to charity is complex and requires careful management to ensure the best tax outcome and overall result. As you guide your client through this process, these steps can help you avoid any pitfalls and help the most people possible.

Verify the Property as a Long-Term Capital Asset

The first step is to confirm that the real estate qualifies as a long-term capital asset, meaning it has been held for more than one year. This may seem straightforward, but it’s an easy point to overlook. We’ve encountered situations where advisors and their clients were eager to donate a property, only to discover that it had been purchased recently. In these cases, the deduction is limited to the cost basis of the property rather than its fair market value, reducing the tax benefits.

Structure the Fund Appropriately

Next, it’s essential to work with the Community Foundation to structure a donor-advised or another type of fund to receive the real estate asset. If your client does not already have a fund in place, this step cannot be overlooked. The deductibility rules for real estate gifts to a public charity, such as a Community Foundation fund, differ from those for gifts to a private foundation. Clients may not be aware of these differences, and without proper guidance, they could miss out on significant tax savings. For instance, transferring real estate to a private foundation can lead to missed opportunities for optimal tax efficiency.

Ensure the Property Is Free from Debt

It is important to quickly verify that the property is not subject to a mortgage or other forms of debt. Transferring encumbered property introduces complex tax considerations and could lead to unintended consequences. Additionally, if the property is commercial, you’ll need to check whether it is subject to “recapture” due to previous depreciation deductions claimed by the client. It’s also worth noting that some lenders may not allow the transfer of encumbered property in the first place.

Assess Income-Producing Properties for UBIT

If the property produces income, this must be carefully evaluated in conjunction with the Community Foundation. Income-generating real estate can trigger the Unrelated Business Income Tax (UBIT) for the Community Foundation. While there are strategies to mitigate the impact of UBIT, including certain exceptions, it’s essential to address this issue proactively to avoid unexpected tax liabilities for the Foundation.

Conduct Environmental Audits as Needed

Depending on the property’s nature, an environmental audit may be required. This step is particularly relevant for properties with a history of industrial or commercial use. Working closely with the Community Foundation, you can determine whether such an audit is necessary to ensure the property is suitable for donation.

Avoid Pre-Arranged Sales to Preserve Tax Deductions

One point to emphasize with your clients is the importance of avoiding any discussions or arrangements regarding the sale of the property before the donation is completed. Even if the Community Foundation plans to sell the property soon after receiving it, any pre-arranged sale could invoke the IRS’s step transaction doctrine, potentially disqualifying the tax deduction altogether.

Obtain a Qualified Appraisal

For your client to claim a tax deduction, a qualified appraisal of the property’s fair market value is essential. The appraisal must comply with IRS regulations and be reported on Form 8283. This step cannot be skipped, as the deduction hinges on the accuracy and validity of the appraisal.

Complete the Legal Transfer

Finally, the legal transfer of the property must be executed with the appropriate documents, including a deed. This step finalizes the donation, allowing the Community Foundation to take ownership and manage the asset in line with your client’s charitable intentions.

Partner with the Community Foundation for Seamless Execution

The Athens Area Community Foundation is here to support you every step of the way during the complex process of donating real estate. Our team of professionals, along with our network of on-call experts, is equipped to handle every aspect of the donation process so that your client’s gift is managed efficiently and effectively.

By partnering with the Community Foundation, you can help your clients turn their real estate assets into lasting legacies for the causes they care about most.