Investment Real Estate Tax Deduction Limits

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					    Gifts of Real
    Estate
                        Unlocking the Financial Benefits




   Most financial planners would agree that         ment property such as condos, apartment
real estate has been a sound investment over        buildings or even shopping malls they no
the years. While there have been wide regional      longer wish to manage. In many cases, they are
variations and dramatic ups and downs — such        looking for tax-efficient ways to pass along the
as the steep declines during the late ’80s to mid   property or convert it into an income stream.
’90s — real estate in many parts of the country
has regained strength.                                 If you are one of these property owners, you
                                                    may want to consider charitable giving options
   Today, many people own long-term, highly         available to you. Often you can unlock the
appreciated property. Aside from a principal        earning potential of the property, save a bundle
residence, they may own a second home or a          in taxes, and at the same time, make a substan-
vacation property they no longer use, or invest-    tial contribution to further our charitable work.
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Why a Gift of Real Estate?                            You also avoid any capital gains tax on a gift of
   Before looking at creative ways in which           long-term appreciated property (property held
both you and charity can benefit, consider the        for more than one year). Finally, the donated
real estate you may own: a personal residence,        property is removed from your estate, thus
vacation home, farmland, rental or investment         bypassing any potential federal estate tax.
property, office building, undeveloped land,          Subdividing Property
inherited property, etc.
                                                         You may subdivide your property and make
    What are your personal and financial goals?       an outright gift of one or more of the parcels.
Do you plan to move or stay in your residence?        You receive an immediate income tax charita-
Is the property more than you care to own? Are        ble deduction for the gift and retain ownership
you bothered by the headaches of managing or          of the land you wish to keep. The property sub-
maintaining the property? Is the property gen-        division option also may be attractive in situa-
erating the rental income you expected? If you        tions where a gift of the entire property would
sell the real estate, will you incur a significant    create an income tax deduction greater than
capital gains tax? Do you need increased cash         the maximum deduction that you could claim
flow now? Do you want a charitable deduction          in the year of the gift.
to help shelter income? Do you want to convert
                                                      Gift with a Retained Life Estate
the property into an income stream?
                                                         Under a life estate arrangement, you retain
   Once you have clearly defined your goals,          the right to live in or use the property for the
you will be in a better position to select the gift   remainder of your lifetime. Upon your death,
option to best fit your needs. Let’s look at some     the property is transferred to us, avoiding the
of the possibilities.                                 delay and expense of probate. A current
                                                      income tax charitable deduction is allowed for
                                                      your gift. We can provide you with an estimate
                                                      of your potential deduction.
                                                          You also will want to contact us to explore
                                                      options available to you should you no longer
                                                      wish to live in or use the property. For example,
                                                      if you relocate, you may want to donate your
                                                      life estate, which can generate another income
                                                      tax charitable deduction.
                                                      Gift of Undivided Interest
                                                         An “undivided interest” consists of a fraction
                                                      or percentage of every substantial right that
                                                      you have in the property. A gift of this type of
                                                      interest is deductible for income, gift and estate
                                                      tax purposes. The gift must be for the entire
                                                      term you own the property and should carry all
                                                      proportional rights of its use and possession.
Benefits of Outright Transfers                           This technique may be most useful when you
Outright Gifts                                        want to make an outright gift of property, but
   When you make an outright gift of real             the gift in its entirety would far exceed your
estate, you can claim an income tax deduction         charitable income tax deduction limits. By con-
for its current fair market value (reduced by         tributing undivided portions in different years
any mortgage debt), subject to annual limits on       until all of the real estate is donated, you can
the charitable deduction based on your adjust-        make full use of annual limits on the charitable
ed gross income. Your deduction can be                deduction. In certain cases, you may be able to
claimed in the year of your gift, and you have        donate some undivided interests outright while
five subsequent years to claim any excess             donating others in exchange for a lifetime
deduction that exceeds the deduction limit.           income (discussed shortly).

                                        Gifts of Real Estate — U NLOCKING     THE   F INANCIAL B ENEFITS
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Gifts through a Will or Trust                        ble remainder unitrust with appreciated com-
    You may transfer your real estate to us          mercial real estate that has been appraised at
through your will or trust simply by designating     $400,000. Additionally, Andrew candidly admits
the property as a bequest. While such a transfer     that he no longer wants to deal with the prop-
does not generate any income tax savings,            erty’s constant maintenance and tenant prob-
bequests to charity from a will or trust can qual-   lems.
ify for an unlimited estate tax charitable deduc-       Andrew’s income tax charitable deduction
tion. You will want to consult your attorney and     for our remainder interest will be nearly
call us for sample bequest language.                 $226,700.* In his 35% marginal tax bracket in
                                                     2006, this deduction will save $79,340 in federal
                                                     income taxes. (Andrew may have to spread the
                                                     deduction over more than one year.) The CRT
                                                     will pay him 5% of the annually determined
                                                     value of the trust for life, with the principal
                                                     going to us upon his death.
                                                        The real estate has an $80,000 cost basis, no
                                                     remaining mortgage, and the rents — after
                                                     expenses — average only 2.5% ($10,000) per
                                                     year. Andrew will recognize no capital gain
                                                     upon transferring the property to the CRT,
                                                     which will save him at least $80,000 in potential
                                                     capital gains taxes (the federal capital gains tax
                                                     rate on depreciable real estate is 25%). The
                                                     trustee of the CRT will sell the property and
Gifts Providing Income                               reinvest the proceeds for a greater return than
   Gifts of real estate also can be made through     the 2.5% Andrew has been receiving.
trusts that pay an income for life or a term of        In addition to making a substantial gift in
years.                                               memory of his wife, Andrew is able to:
                                                     • increase his annual cash flow;
Charitable Remainder Trust                           • avoid an immediate capital gains tax on the
    The charitable remainder trust (CRT) is one        $320,000 of appreciation when the property
of the most popular gift planning techniques           is transferred to the trust;
for today’s donors. By funding a CRT with real
estate, the donor can postpone or spread out         • receive an income tax charitable deduction
capital gains tax liability. The trust invests the     for our remainder interest of about $226,700
proceeds from the sale of real estate in a diver-      which generates a huge income tax savings
sified portfolio of stocks, bonds and other            of about $79,340;
investments. The trust will pay an income to         • remove a $400,000 asset from his gross estate
you (and/or others designated by you) for life,        for federal estate tax purposes; and
or a term of years not to exceed 20. You receive
an immediate income tax charitable deduction         • eliminate the management burdens of own-
for the present value of our remainder interest        ing the property.
and reduce your potential estate tax liability by
removing an asset from your estate.                    Please note that other life income gift plans
                                                     may be available to you. We’ll be happy to help
   Example: Andrew is a 72-year-old widower          you find the plan that best fits your situation.
whose wife had been a staunch champion of
our programs and services. He wants to estab-
                                                         *Based on an AFR of 5.0%. This rate changes month-
lish a gift in her memory by creating a charita-     ly and will affect the amount of the deduction.




                                        Gifts of Real Estate — U NLOCKING      THE   F INANCIAL B ENEFITS
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Installment Bargain Sale                            and to pay that sum in equal annual install-
   In appropriate circumstances, you may wish       ments over 10 years. Martin will also be making
to consider selling your property to us for less    a deductible gift of the remaining $200,000 in
than its fair market value. Such a “bargain sale”   value.
provides you with immediate payment for the             In his 35% tax bracket, the $200,000 charita-
sale amount and an income tax charitable            ble deduction will result in federal income tax
deduction for the difference between the pur-       savings of $70,000. Martin’s $100,000 basis must
chase price and the fair market value. You also     be allocated between the gift and the sale por-
avoid tax on a portion of the capital gain.         tions of the transaction, as in any bargain sale.
   A bargain sale of realty to our organization     Here, $60,000 is allocated to the sale portion
creates two significant benefits: cash-in-hand      and $40,000 to the gift portion. Martin’s tax-
from the sales portion of the transaction, and      able gain on the sale portion is $240,000
income tax savings from the charitable deduc-       ($300,000 sale price minus $60,000 allocated
                                                    basis). Recognition of this gain for tax purposes
                                                    is spread over the installment period. Martin
                                                    will receive payments of $30,000 per year, and
                                                    $24,000 of each payment will represent taxable
                                                    gain.
                                                      What goals have been accomplished? Martin
                                                    has:
                                                    • converted an unproductive asset into a 10-
                                                      year income stream of $30,000 per year;
                                                    • secured income tax savings of $70,000 from
                                                      the charitable deduction for the gift portion
                                                      of the transaction;
                                                    • avoided incurring a huge capital gains tax in
                                                      the first year, and spread this liability out
                                                      over 10 years;
                                                    • avoided the legal and administrative expense
                                                      of setting up a CRT; and
                                                    • made an impact gift to further our work —
tion allowable for the gift portion. This option      a gift not otherwise possible.
can be particularly useful if you need cash for a
down payment on new property or if you need
to pay off debt when you transfer the property.     Important Considerations in
   A bargain sale also may be set up so that you    Planning Gifts of Real Estate
receive both up-front cash and income for life         A gift of real estate requires careful plan-
or a period of years. When the charity pays the     ning. For such gifts to be accepted, the proper-
bargain price in installments, you receive a        ty must be suitable for sale, or for our own pur-
periodic cash flow and spread your gain over        poses.
the payout period.
                                                       Your first step in considering a gift of real
   Example: Martin owns 20 acres of unim-           estate should be to consult your advisors (attor-
proved real estate appraised at $500,000. His       ney, accountant, etc.) and our development
cost basis is $100,000 and there is no debt on      office. We can advise you on the property’s suit-
the property. The location is attractive to our     ability and provide you and your advisors with
organization as a possible future building site.    detailed illustrations describing the potential
We agree to purchase the property for $300,000      tax savings, available income, and other advan-



                                       Gifts of Real Estate — U NLOCKING    THE   F INANCIAL B ENEFITS
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          tages of any type of gift plan. In addition, we       review to assure that property is not subject to
          can provide you and your advisors with sample         unknown contamination. This may involve a
          forms and other information helpful to com-           site reconnaissance and inspection of town and
          pleting your gift.                                    state records. Or it could involve securing the
                                                                services of an environmental testing company
             Some of the key considerations involving a         or having a survey prepared to determine the
          gift of real estate include:                          boundaries of a property. Gifts of residential
          Marketability                                         real estate usually require a thorough inspec-
                                                                tion.
             Most outright gifts of real estate should be
          readily marketable so that we have the option         Other Considerations
          of selling the property if that would best serve          Donated property should be free of debts,
          our charitable purposes. If the gift is made to       liens, mortgages, etc. In some cases, debts may
          fund a charitable remainder trust to provide          be transferred to other property or paid prior
          income for yourself or loved ones, a sale of the      to donation. The property should be properly
          property may be appropriate if it does not pro-       zoned to assist marketability. The transfer of
          duce rental income. Note: Current law pro-            title usually requires a warranty deed.
          hibits you from agreeing to sell the property to
          a third party prior to donating it to us or to a
          charitable remainder trust.
                                                                Let Us Hear from You
          Professional Appraisal                                   Gifts of real estate offer you the opportunity
              The Internal Revenue Service requires that        to make large, meaningful charitable gifts and
          the donor obtain an appraisal from a qualified        to enjoy substantial tax and financial benefits.
          appraiser to substantiate the value claimed as        The key is careful planning and making certain
          the basis for a charitable deduction. The             that the gift benefits the charity and you.
          appraiser should be independent and one who              To find out more about the exciting oppor-
          is familiar with real estate values in your area so   tunities available to you through a gift of real
          that the appraisal is both accurate and current.      estate, we invite you to contact our office. Be
          The responsibility of getting — and paying —          assured that you can explore the benefits with-
          for the appraisal falls upon the donor.               out obligation and that your inquiry will receive
          Environmental Review                                  prompt and courteous attention.
             A gift of commercial real estate often
          requires at least a preliminary environmental




                                                                Orange County United Way
                  Figures in our examples are based             18012 Mitchell Avenue South
                  on average interest rates, and may            Irvine, California 92614
                  be different at the time of a gift.
                  The federal estate tax is scheduled           (949) 660-7600 tel
                  to be repealed for one year in 2010.          (949) 724-3040 fax
                  Tax information provided herein is
                  not intended as tax or legal advice           www.unitedwayoc.org
                  and cannot be relied on to avoid
                  statutory penalties. Always check             Contact: Major Gifts Department
                  with your tax and financial advisors
                  before implementing any gift.




GOR0106                                           Gifts of Real Estate — U NLOCKING     THE   F INANCIAL B ENEFITS

				
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