CHARITABLE PLANNING

Jeffrey D . Haskell

While some dismiss the idea of donating real estate , there can be good reasons .

T ’ S OFTEN ASSUMED THAT DONATIONS OF REAL ESTATE TO PRIVATE foundations aren ’ t ideal because the charitable deductions for such donations are typically limited to whichever is less : the donor ’ s cost basis or the fair market value . And such donations are often dismissed out of hand , regardless of whether the property has depreciated or appreciated in value .

If a property has significantly depreciated in value below its original purchase price , donating it directly to the foundation isn ’ t recommended because the donor wouldn ’ t be able to realize the capital loss . Instead , donors typically are advised to sell the property and then contribute the proceeds . Even a donation of highly appreciated real estate typically is not recommended , as the donor would only be able to claim a cost basis deduction .

Yet despite the arguments against donating real estate to a private foundation , there are times in which such gifts do make sense , both for foundations and donors .

Foundations , for their part , can use a real estate donation to generate a steady stream of income and liquid funds ( from rentals , for instance ). If the property is used for charitable purposes , the organization may be able to qualify for an exemption from property taxes .

This might be a financially savvy move for the donor as well . When they ’ re weighing the merits of this kind of gift , they should consider their basis in the property , the property ’ s fair market value , and whether the donation is part of an estate plan . So when does it make sense to donate real estate to a foundation ? 1 . When the cost basis and the fair market value of a property are similar . This is sometimes the case in parts of the country where the real estate market is still recovering . If the donor ’ s property is worth approximately what he or she invested in it , donating it could be an appealing option . 2 . When the donation of the real estate is part of an estate plan . If this is the case , the basis in the property is stepped up , typically to the date of the donor ’ s death , which ensures that the basis is actually equal to the fair market value of the real estate , at least at that point in time .

( Note : A possible benefit for the foundation is that there may be no more than a nominal tax liability upon the ultimate sale of the donated property , since there would be little capital gain . If there is no gain at all , there may be zero tax liability . But even if there is , the foundation would only be taxed at a rate of 1.39 %.)

3 . When the value of the real estate has appreciated significantly over what the donor originally paid .

If a foundation has accumulated excess distribution carryovers as a result of over-granting beyond the required 5 % during its preceding five taxable years , it can make a special “ conduit election ,” which would entitle the donor to receive a fair market deduction ( just as if the property were donated to a public charity ) instead of the more limited cost basis deduction . This way the donor averts the need to sell the property and donate the proceeds . This method also allows the donor to make use of higher adjusted gross income percentage caps ( which are 30 % for non-cash donations to a public charity whereas non-cash donations to a private foundation are capped at 20 %).

Cautions For Donors

Keep in mind that donors should avoid contributing real estate encumbered by a mortgage , in which case they might run afoul of rules about self-dealing if the contribution results in relief of debt for them . Even when the debt is small in relationship to the property ’ s value , it could still trigger penalties for which the donor ( not the foundation ) would be personally liable .

This problem arises when the foundation assumes the mortgage on the property , or takes the property with a mortgage placed on it by a “ disqualified person ”

22 | FINANCIAL ADVISOR MAGAZINE | SEPTEMBER 2024 WWW . FA-MAG . COM