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Gifts Of Real Estate: Watch Every Step

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 Tidewater Jewish 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 TJF is a public charity, when it sells the donated property, the proceeds will flow into the designated charitable 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 acquired. 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 TJF to structure a donor-advised or other type of charitable 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 community foundation fund like TJF) 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 TJF. Income-producing real estate can potentially trigger “UBIT” (unrelated business income tax) for TJF. Although there are exceptions and strategies to minimize UBIT’s impact, it’s important that this issue be dealt with up front. 
     
  • You may need to work with TJF to determine whether an environmental audit is required for the property. 
     
  • Verify that the client has not entered any discussions about an imminent sale of the property. Even if TJF will sell the property shortly after receipt (so that the proceeds can flow into the donor-advised or other fund to support the client’s favorite causes), your client cannot have pre-arranged this sale. Doing so could trigger the IRS’s step transaction doctrine and wipe out the tax deduction.
     
  • Importantly, ensure that the client obtains a qualified appraisal to determine the fair market value of the property within applicable timeframes. This is critical to obtain a tax deduction, and the appraised value must be reported to the IRS on a Form 8283 in strict compliance with the IRS’s rules.
     
  • Finally, transfer the property with the appropriate legal documents, including a deed. 

Whew! That seems like a lot!  However, it is a process with which TJF has extensive experience.  The bottom line here is that gifts of real estate can be a wonderful tool for both your client and the charities they want to support through their fund at TJF. Our team can help you through the process, every step of the way.

We have professionals in house, as well as on-call experts with whom we work regularly, to ensure that your client’s real estate gift is handled without a hitch, opening the door to bring their charitable goals to life. 

Contact Naomi Limor Sedek at 757-965-6109 or nsedek@tjfva.org, or Randy Parrish at 757-965-6104 or rparrish@tjfva.org.

The team at the Tidewater Jewish Foundation (TJF) is a resource and sounding board as you serve your philanthropic clients. We understand the charitable side of the equation and are happy to serve as a secondary source as you manage the primary relationship with your clients. This newsletter is provided for informational purposes only. It is not intended as legal, accounting, or financial planning advice.