Real estate is one of the best charitable gifts an individual can make, and you can use these two main strategies to educate your clients on the opportunity. For a concise summary to share with clients, see our real estate fact sheet here with the details of these strategies, but below are the basics of how to make real estate gifts a reality for your clients.
Strategy #1 – Gift Before a Sale
Gifting all or a portion of a piece of property before the sale occurs.
- The gift, meaning actual transfer of ownership, needs to occur before there is a binding obligation to sell the property. For example, most real estate contracts are binding, even though a buyer has an inspection period, etc.
- The gift can be as large or small as the donor desires, even up to 100%.
- Low debt or no debt makes a better gift.
- High appreciation is key for the charitable and tax advantages.
Example: A farmer is selling a large tract of land for $2 million with a tax basis of $200,000. The farmer intends to give 20% to ministry. He donates a 20%, undivided interest in the real estate, meaning that the physical land is not subdivided or does not need to have a survey, to his donor advised fund (DAF) at The Signatry before the property is under contract. By using this strategy, the farmer will:
1) Avoid capital gains tax for the gifted portion. Approximately $75,000 is avoided;
2) Receive a larger income tax deduction for the fair market value of the gift. Nearly $30,000 of taxes is saved; and
3) Ministries/charities will receive almost $75,000 more because of the capital gains tax avoided!
Check out the Generosity Calculator here and run some of these numbers for yourself to see how different scenarios impact potential savings and charity benefit.
Strategy Number #2 – Long Term Hold
Gifting a portion of income producing real estate to be held indefinitely.
- The property’s value has appreciated, but the donor does not want to sell the real estate investment.
- The Signatry’s team will handle the transfer of the ownership and setting up the arrangement between the donor and/or property manager in order to ensure that the rents are collected and handled properly.
- No debt is best, but low debt is not bad.
- The donor typically gives certain amounts to ministry and charity every year. It is even better if the donor has maxed out other charitable deductions.
- The property can be held by The Signatry for as long as the donor desires. Therefore, a gift of income producing property could continue supporting the donor’s charitable giving for years or decades in the future.
Example: A real estate investor owns an office building that has appreciated in value of several years, valued at $3 million, and has great cash flow annually, which is approximately $300,000 net. The donor gives approximately 15% of the profits from the office building to their church every year, approximately $45,000.
The donor decides to gift a 15% undivided interest of an office building to their DAF at The Signatry. The donor serves as the property manager and continues to operate and manage the property, but in essence 15% of the net proceeds go to her DAF. They receive a tax deduction for the fair market value of the 15% interest, a $450,000 deduction, which equates to approximately $180,000 in taxes saved. Plus, 15% of the rents now go to their DAF tax free; the donor and The Signatry do not have to pay taxes on the rents to the DAF. Overall, the donor is able to do the same giving (i.e. 15% net profit to her church – now tax free), and they receive a large income tax deduction of $450,000. A win-win!
These opportunities to gift real estate provide a way for you to serve clients with innovative strategies that can potentially save taxes and maximize their generosity. You can help transform their resources into greater impact.