Giving real estate: Part 5

By Todd Cohen

Changes in the economy and stock market can affect the attractiveness of charitable gifts of real estate.

The number of real estate gifts to Princeton, for example, declined with the recent the slump in the stock market.

“If the rest of your property is going down in value, you are probably less inclined to make gifts of real estate as well,” says Ronald Brown, director of planned giving.

Because they are used mainly to defer capital gains, gifts of real estate to charitable remainder trusts have slowed as capital gains taxes have dropped to about 15 percent, about half what they were five years ago, says Ramsay Slugg, Fort Worth, Tex.-based central region director for charitable management services for the private bank at Bank of America in Charlotte, N.C.

Also curbing gifts of real estate to charitable remainder trusts, he says, have been historically low interest rates because they are used to value the gift to the charity.

“When you’ve got a low capital-gain rate and low interest rates, then the case for charitable remainder trusts becomes less compelling from a tax planning point of view,” he says.

Still, he says, land is a “huge asset.”

Donating an appreciated asset as a direct gift is more efficient than donating cash, he says.

“Cash is an after-tax asset,” he says. “You’ve already had to have paid either income tax or capital gains tax as you’ve received the cash.”

But an appreciated asset like real estate is a “before-tax asset,” he says.

“You haven’t had to pay the tax yet,” he says. “So if you give that away, you aren’t going to have to pay those taxes.”

And by keeping a “life estate” in real estate donated to a charity, a donor can continue using the property while receiving income from the trust, Slugg says.

“You get to live there or use it for the rest of your life and then, when you die, it automatically goes to the charity,” he says. “You have the same tax consequences.”

The donor pays no estate tax because the charity owns the property, he said. And while the gift takes effect later, the donor gets an income tax deduction now on the present value of the remainder interest, and pays no capital gains tax, because the gift has been made.

An increasingly popular strategy for donors has been to donate conservation easements to charities that limit development of real estate, a strategy that he estimated had grown 10-fold in the past 10 years.

By limiting development, the donor lowers the value of the property and can treat the lost value as a gift, Slugg says, but the easement also can saddle the donor and the donor’s family with property that may not grow in value.

Other stories in the series:

Part 1: Real estate gifts pose challenge for donors, charities.

Part 2: Some charities move to make a market for real-estate donors.

Part 3: Donors have options in picking a vehicle for real estate gifts. 

Part 4: Complex tax and financial issues await donors of real estate.

Part 6: Environmental cleanup can slow real-estate gifts.

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