CHARITABLE GIFTS OF REAL ESTATE

CAN BENEFIT HABITAT FOR HUMANITY

By

Jon H. Trudgeon

Hartzog Conger Cason & Neville

1600 Bank of Oklahoma Plaza

201 Robert S. Kerr Avenue

Oklahoma City, OK 731-2-4216

Telephone: (405) 235-7000

Email: jtrudgeon@hartzoglaw.com

When most people think of making a gift to their favorite charity, they think of writing a check. But for many donors a gift of real property may be more valuable to both the donor and the charity. This is particularly true regarding charities like Habitat for Humanity which require a continuing line of real estate acquisition to accomplish its charitable purposes.

Few people make charitable gifts just to obtain a tax advantage, but the tax benefits to the donor cannot be ignored.  Contributions of real property represent a form of giving that can be rewarding to the donor and the charity alike.  Sometimes they can be the most complicated of gifts, but sometimes they facilitate ways to meet the goals of both the donor and the charity in ways no other gift can.

Of course, Habitat is always looking for property that it can use immediately in its programs of home construction.  But receiving other types of real property may be just the ticket that is needed for Habitat to open access to the type of real property it really wants.  One property owner may be looking for the opportunity to exchange a tract of land he owns, that is suitable for Habitat's objectives, for property Habitat receives from another donor.  Both property owners benefit – one through a tax deduction and the other through a tax deferral (having avoided a sale in favor of a tax-free exchange).

Many tax advisors suggest that a property owner should never sell real estate without considering possible benefits of giving the property to charity.

Gifts of real property often involve property that has appreciated significantly in value since acquired by the donor. Gifts of cash involve giving money on which the donor has already paid tax – of perhaps 35% or more.  So, if a donor first sells his land and pays taxes on the proceeds, the charity receives only what is left after taxes.  And, the donor's tax deduction is also limited to his after-tax proceeds.

On the other hand, if the donor makes a gift of the real property itself, the donor usually is entitled to an income tax deduction equal to the fair market value of the property.  The charity would have the property that is worth more than the money it would have if the donor sold the property and made a cash gift.  Further, if the charity sells the property it does not pay tax on the proceeds.

Another popular device used to accomplish a property owner's mixed charitable inclination and desire to benefit economically from the increased value of property is a gift of the property to a charitable remainder trust.  In this case the donor retains the benefit of an income stream from the trust, in the form of a “unitrust amount” or an “annuity amount” each year, and the charity receives what remains in the trust after the income stream has been provided.  For gifts to a charitable remainder trust, the charitable deduction is limited to the value of the remainder interest the charity will actually receive.  Often in these gifts, the trustee of the trust elects to sell the property and invest the proceeds to provide the income stream.  The advantage is that the charitable trust is not taxed on the proceeds at the time of the sale.

The sale proceeds are all invested for the benefit of both the donor and the charity.  “Income” distributions are taxed to the non-charitable trust beneficiary under a procedure that first distributes ordinary income from the investment of the proceeds of the sale before distributing any capital gains realized from the sale.  Often the non-charitable beneficiary receives a greater income distribution from the trust than was generated from owning the property before the gift to the trust.

These types of gifts are subject to strict guidelines, established by the Internal Revenue Code and the IRS, that must be reviewed by both the donor and the charity before the gift is made.  There are many considerations.  For one, the gift requires a determination of value of the property by a "qualified appraisal" made by a "qualified appraiser" contemporaneous to the transaction.  The income interest of the non-charitable beneficiary must meet precise guidelines.

Different issues apply if the donor is a business entity.  One of those issues regarding gifts by S corporations has just been modified by the 2006 Pension Reform Bill.  This provision has no relation to pension reform other than its inclusion in the bill made passage of the legislation possible.  Formerly, the corporation was permitted to pass the tax deduction through to its shareholders, but only to the extent of a basis adjustment to the shareholders' stock in the S corporation.  For gifts by an S corporation in 2006 and 2007, that reduction in stock basis will be limited to the shareholders' share of the S corporation’s basis in the property contributed.

Gifts of real property to charity should be done carefully; but, the rewards can be significant.

Please consult your legal and/or tax professional for all determinations of value and/or tax benefit.