By Todd Cohen
The Real Estate Charitable Foundation in Kansas City generally works with outright gifts, deferred gifts and bequests.
The simplest transaction is an outright gift, with the donor transferring title immediately to the charity and, if the donor has owned the property for more than year, getting an income-tax deduction equal to its fair market value and avoiding the capital gains taxes that would have been incurred by selling the property, says George Bittner, executive director.
For a gift of commercial property such as an apartment building that generates rental revenue and has no mortgage, he says, the tax savings include both an income tax deduction equal to the property’s fair market value, and avoidance of tax on any capital gain.
In a typical deferred gift, a donor makes an irrevocable gift to either a charitable remainder unitrust or annuity trust, and in return can receive a partial income tax deduction for the current value of the gift.
An annuity trust makes a fixed payment to the donor, and to any income beneficiaries the donor selects, generally for the rest of their lives, with the remainder going to the charity or charities designated by the donor.
The Real Estate Charitable Foundation prefers to use “flip” unitrusts to accept gifts of undeveloped land and other real estate that may not generate enough current income to satisfy the annual distribution requirements to the income beneficiaries.
Unlike an income-only unitrust, in which the trustee makes an annual payment to the donor of at least 5 percent of the value of the trust assets, a flip unitrust lets the trustee pay a stated percentage of the value of trust, or net income, whichever is less, until the property is sold and the trust “flips,” or converts to a standard unitrust that pays a stated percentage, typically 5 percent to 7 percent.
Late in 2003, the foundation was approached by an elderly donor who owned several acres of undeveloped land that was adjacent to an interstate in Greater Kansas City and worth about $1.5 million, five times the purchase price, but not producing any income.
The donor could have sold the land for cash, but would have had to pay combined federal and state capital gains taxes of about $240,000.
Instead, the donor donated the land to a charitable remainder flip unitrust, took an income tax deduction of 25 percent of the fair market value of the property placed in the trust, and avoided the capital gains tax.
Because the undeveloped land near the interstate is not generating any revenue the foundation, as trustee, can use to pay income to the donor, it has put the property up for sale and is considering two pending offers.
Once the property is sold, the trust will flip from a net-income-only unitrust to a standard charitable remainder unitrust.
A donor also can donate real estate by bequest, a gift that can reduce the donor’s estate tax but also can cost the donor an income tax deduction, Bittner says.
“You get two bites of the apple giving while you live,” he says, “as opposed to one bite giving through your estate.”
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