Charitable gifting through donations of real estate is one of the most underutilized methods of transferring assets in today’s market, although in many cases it can be the most viable strategy as far as the disposition of certain real estate is concerned.
An estimated $300,000 billion of assets are given to more than 1.3 million 501C3 charities in the United States each year, but less than 3 percent of those donations involve real estate equities. This disparity is not for lack of availability: Approximately 43 percent of the estimated $64 trillion in U.S. capital wealth involves real estate.
Why is there such disparity between the value of the real estate available for contributions to charities and the amount that is actually donated?
In many cases, the investors/owners are unaware that donations can be a viable means to dispose of property. In addition, charities turn down an estimated 80 percent of real estate donations offered to them.
Environmental horror stories and holding costs for maintenance, entitlements, and market features also cause some charities to shy away from real estate donations. In cases where the charity has neither the knowledge nor financial resources required to proceed with such a transaction, a third-party professional facilitator that is equipped to manage all facets of a real estate donation on behalf of the charity, including receiving and liquidating the property, for a percentage of the cash received can be brought in.
Unlike standard real estate transactions where legal representation is sufficient, gifting of real estate involves a team, which, in many cases, is coordinated by a qualified real estate broker. On the donor side the team includes an attorney, a financial planner, an accountant, and an appraiser. On the donor side, in addition to real estate and legal representatives, specialists such as engineers may be required. The goal is always to ensure that all parties are fully and clearly represented.
There are many different ways that the gifting of real estate can be accomplished depending on the donor’s goals. An outright gift is the most straightforward method of donating a real estate asset. The main benefit of outright gifting is that the donor may take the full-appraised value of the asset as a tax deduction at the time of the title transfer to the charity.
The donor also has the benefit of determining the timing of the asset disposal and can mitigate costly delays in transferring title. Bargain sales are another option whereby the difference between the market price and the sales price is a tax-deductible gift.
Therefore, a donor can receive part of the equity and at the same time have a tax deduction. Charitable remainder trusts can be structured where the real estate is utilized as a finding source. With CRTs, the donor deeds the property into an irrevocable trusts and received an income stream; upon termination of the trust, the charity receives the remaining assets.
Through a CRT, the corporation or individual avoids capital gains taxes and receives a tax deduction and cash flow. Bequests and retained life estates are estate-planning methods that can also ultimately benefit the charity. Although philanthropic intent should be an overriding factor in any charitable donation, several other benefits can accrue to a donor, such as relief from capital gains taxes; reduction of federal, state, and transfer taxes; elimination of management responsibility; and potential for an income stream.
There are many individuals, investors, and corporate real estate professionals who are faced with non-productive real estate assets that are difficult to move. And, even though a certain value can easily be justified, the ultimate sales price may reflect a significant discount. The charitable gifting of that real estate may actually be the best exit strategy when weighing such considerations as timing, economics and public relations.
Duncan Patterson, CCIM, is president of Patterson-Woods & Associates LLC in Greenville. He has given seminars on “Charitable Gifting Through the Donation of Real Estate” throughout the country.