Gifts of real estate: Watch every step We’re hearing from more and more attorneys, accountants, and financial advisors that your clients are expressing interest in giving real estate to charity. This is wonderful news! You’re certainly aware that gifts of real estate to a fund at the community foundation, just like gifts of other long-term capital assets, can be extremely tax-efficient. That’s because your client is typically eligible for a charitable deduction based on the fair market value of the property. Because the FM Area Foundation is a public charity, when it sells the donated property, the proceeds will flow into the fund free from capital gains tax. To achieve the best tax outcome and overall charitable result, though, it’s critical to undertake a careful process along the general lines of the following (depending of course on the specific situation): –First, you’ll need to determine that the real estate is a long-term capital asset (held for more than one year). That may sound obvious, but we’ve talked with advisors and their clients in the past about a potential gift of real estate and it turned out that the property was only recently purchased. The fair market value deduction (versus cost basis deduction) is available only for a long-term capital asset. –Next, you’ll want to work with the team at the FM Area Foundation to structure a donoradvised or other type of fund to receive the asset, if your client does not already have a fund in place. The deductibility rules are different for real estate gifts to a public charity (such as a FM Area Foundation fund) versus a private foundation. Again, clients may not be aware of the pitfalls here. Sometimes we meet with advisors whose clients are very close to transferring real estate to a private foundation, which could be devastating in terms of missed tax savings. –You’ll need to verify that the property is not subject to a mortgage or other debt. Transferring encumbered property triggers important considerations with potentially significant tax consequences. The lender might not even allow a transfer in the first place. If you’re dealing with commercial property, you’ll also need to check to be sure that the property is not subject to “recapture” if your client has previously taken depreciation deductions. –You will need to determine whether the property produces income and discuss this with the FM Area Foundation. Income-producing real estate can potentially trigger “UBIT” (unrelated areafoundation.org
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