Gifts of Real Estate: Watch Every Step

Donors Steve and Lisa Mason with OCCF’s Lindsay Laird

Achieve the Best Tax Outcome and Charitable Result

To maximize your client’s tax benefits and charitable goals, it’s important to follow a careful process based on the specific situation:

1. 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 purchased. The fair market value deduction (versus cost basis deduction) is available only for a long-term capital asset.
2. Work with our expert team to structure a donor-advised or other type of 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) 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 benefits.
3. 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.
4. Determine whether the property produces income and discuss this with the Community Foundation. Income-producing real estate can potentially trigger “UBIT” (Unrelated Business Income Tax) for the Community Foundation. Although there are exceptions and strategies to minimize UBIT’s impact, it’s important that this issue be dealt with upfront.
5. Work with the Community Foundation to determine whether an environmental audit is required for the property.
6. Verify that the client has not entered into any discussions about an imminent sale of the property. Even if the Community Foundation 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.
7. Ensure the client obtains a qualified appraisal to determine the fair market value of the property. This is critical to obtain a tax deduction, and the appraised value must be reported to the IRS on Form 8283 in strict compliance with the IRS’s rules.
8. Transfer the property with the appropriate legal documents, including a deed.

Real estate can be a wonderful tool for both your client and the nonprofits they want to support through their fund at the Community Foundation. However, each gift of real estate is unique. There is no one-size-fits-all template for these transactions. Our experienced team is here to support you every step of the way. We have professionals in-house, as well as on-call experts with whom we work regularly, to make it easy for you to navigate your client’s real estate gift and achieve their charitable and financial goals.