| Buy land—they ain't making any more of that stuff.
—Will Rogers
More than half a century later, Will Rogers' statement is more apt today than ever. On an economic level, real estate has proven to be the cornerstone of the fortunes of many of the country's wealthiest people. But, even when demand is strong, a real estate investment can require a significant commitment of time and/or resources—insurance costs, rent collection, maintenance, yard work, etc., to manage and maintain.
AN EXCELLENT CHOICE TO FUND A CHARITABLE GIFT
If you are interested in making a transformational gift but do not think you have the resources to do it, the ASHRAE Foundation has several alternative solutions that benefit both the Foundation and yourself. A gift of property could include unused land, a vacation home, rental properties or your personal home.
Many a real estate investor with significant charitable objectives will find that his or her appreciated real estate is the best asset to give because of the ability to reduce or even eliminate the capital-gain tax that will be due if the property is sold.
YOUR OPTIONS
1. Outright Gift of Real Estate: You can make an outright gift of property to the ASHRAE Foundation, which yields the highest tax deduction (30% of adjusted gross income with a five-year carry-over period) for you and the largest gift to the Foundation. This option also relieves you of the management and maintenance of the property immediately, along with the burden of selling the property yourself.
Example: Undeveloped land that Tom bought several years ago for $10,000 is now worth $100,000. If he sells, his tax bracket will require that he pay capital-gain tax of $13,500. Instead, he decides to give the land to the ASHRAE Foundation. He does not recognize any gain, and he can claim a deduction for the land's full $100,000 fair-market value. In his 33% federal tax bracket, Tom's gift saves him $33,000. The real cost of Tom's gift is only $53,500 ($100,000 real estate value + $33,000 income-tax savings - $13,500 capital-gain tax avoided).
2. Bargain Sale: A bargain sale is just what it sounds like: an owner transfers real estate to a charitable organization in exchange for a payment that is less than the full value of the property. Typically, the donor qualifies for a charitable deduction equal to the difference between the fair-market value of the property and the amount of the payment received. In addition, the donor has to recognize the capital gain attributable to the "sale" element (amount received).
Example: The Taylors own a vacation lake house that they rarely use now that their children are grown. They would like to make a substantial gift to support ASHRAE Foundation, and they think the lake house would be an ideal asset with which to fund their gift. This home is now worth about $250,000, and the Taylors would be happy to use it to make their gift if they could recover their original $100,000 investment. After some discussion, the Foundations enters into an agreement with them to sell the house to the ASHRAE Foundation for $100,000. They generate a charitable deduction of $150,000 as a result of this bargain sale.
Also, the Taylors have to recognize and report a capital gain of $60,000, attributable to the sale element of the bargain sale. Of course, the capital gain the Taylors have to report is more than offset by the charitable deduction.
3. Receive a stream of income: It is not always an asset itself that is difficult to give up; it's often the cash flow that asset can generate. Careful planning can allow you to both maintain cash flow from your property and actually increase spendable cash—all while making a gift to ASHRAE Foundation, receiving substantial tax deductions, and reducing or eliminating tax on capital gain.
Real estate is an excellent asset to fund a planning vehicle known as a charitable remainder trust, that makes payments for life or for a term of years not to exceed 20. A particular type of charitable remainder trust is called a flip unitrust. With this type of trust you deed real estate to a trust which is responsible for selling the property. Before the property sells, you would still receive the net income, if any, generated by the real estate. Once the property is sold, the trust would begin paying a percentage of not less than 5% of the fair market value of the trust assets which generates yearly income for you. This gift allows you to receive a tax deduction upon the creation of the unitrust, avoid capital gain taxes and receive income, and allows ASHRAE Foundation to not have to defer any payments to the donor until the property is sold.
Example: Bill, 72, bought acreage for $50,000 that is now worth $500,000. Bill would like to sell and reinvest the proceeds but the $67,500 tax on capital gain would leave just $432,500 to reinvest. At 5%, that would generate $21,625 each year.
Bill can transfer this land to a 5% flip unitrust. As a result, Bill will be entitled to a charitable deduction of $276,435. The trustee sells the land for $530,000. The trust, being tax-exempt, will not pay any capital-gain tax on the sale. The year after the sale, the unitrust will distribute $26,500 (5% of $530,000) to Bill. Thereafter, the annual payment will equal 5% of the annual value of the unitrust. At his death, the remaining assets in the unitrust will be distributed to ASHRAE Foundation.
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