RALEIGH, N.C. — Since July 1, 2005, N.C. State University has received 48 gifts of real estate or conservation easements with an estimated value of over $60 million.
As a land-grant university with a College of Agriculture and Life Sciences and a College of Natural Resources, N.C. State gets a lot of gifts of land, both to keep for its research and programs and to sell for cash.
The College of Agriculture and Life Sciences, for example, owns 25 farms or tracts of land throughout the state that it has received as gifts.
The weak economy, plus possible changes in the federal tax code, may be causing donors everywhere to rethink or delay making gifts of real estate to charities, N.C. State development officials say.
But those same factors, particularly uncertainty about possible changes in the taxes on capital gains and estates, also may be prompting donors to talk with their professional advisers about making gifts of real estate to manage their estate planning.
“This area, like others, has probably slowed down as it relates to specific gifts,” says Steve Watt, executive director of gift planning at N.C. State.
But it “remains a very common topic for exploration of possible gifting scenarios with individuals because there is still appreciation in value in real property,” he says.
Keith Oakley, executive director of college advancement for the College of Agriculture and Life Sciences at N.C. State, says the decline in real estate values “certainly has impacted people’s willingness and ability to fund those kinds of gifts.”
But it also has prompted people to see the opportunities in donating land.
Gifts of real estate, Oakley says, may be “one of the most underutilized tools for donors in terms of making gifts to support their charities and also as an estate-planning tool.”
The value of appreciation
Watt says the main consideration with a gift of appreciated assets, such as real estate, is the “ability for the charitable deduction to be based on the current appraised fair-market value of the property.”
Because it has been in the same hands for a long time and grown in value, he says, some real estate, despite recent declines in value because of the recession, still represents “significant appreciation.”
Using that real estate as part of a charitable strategy, he says, lets the donor “derive the benefit of the increased value while possibly not facing adverse consequences that might come through the sale of the property or the property being passed through their estate.”
Oakley says donors may be waiting to see how the recession has affected the value of their real estate before deciding whether to donate it to charity.
“People have a number in mind of how much they think [their real estate is] worth,” he says. “If it’s less now, they may be less inclined to use that asset to fund the gift. People may want to feel they’re maximizing the value of the asset.”
Uncertainty about possible changes in the federal tax code also may be having a big impact on gifts of real estate.
Federal legislation enacted in 2001 provided both for the estate tax to end on Jan. 1, 2010, and for a change in how assets are valued in an estate.
“For some individuals, the estate might not be subject to estate tax, but the inherited assets might be subject to capital gains tax,” Watt says. “It makes the conversations perhaps a little more complex.”
Compounding the uncertainty, he says, have been discussions in Congress about extending the estate tax, or letting it “sunset” on Dec. 31, 2010.
Development officers at N.C. State want donors “to understand the possibilities, the choices that are afforded to them in the way the tax code is set up, to allow people to be able to support charitable organizations they wish to support,” Watt says.
“Ultimately, these types of gifts have to work in the best interests of the donor,” he says. “So we always encourage our prospective donors to review everything with their professional advisers.”
Oakley says donating real estate can be a great strategy for donors in managing their estate taxes.
To protect their estates from having to pay estate taxes that formerly could have been as high as 55 percent of the value of their estates, payments that must be made in cash, Oakley says, donors can work with their lawyers and financial advisers to look for ways to use charitable gifts of real estate to manage the distribution before their death of assets to their heirs.
The tax code lets people distribute a specified amount of their assets to individuals every year, and a specified maximum to their heirs over the donor’s lifetime.
Individuals can use those distributions to reduce the value of their estate, and thus the tax on that estate after they die.
Individuals, for example, can create a family corporation or trust, put assets into those entities, and each year give away the total share of those assets the law allows, Oakley says.
“It’s a way to distribute your estate to your heirs and get all of it out of your estate before gift taxes,” he says.
And because estate taxes must be paid in cash, and real estate is not a liquid asset that can be converted quickly to cash, he says, using real estate to make a charitable donation can minimize the possibility it might have to be sold quickly and far below its value at a “fire sale” to generate the cash needed to pay the estate tax.
While current real estate values totaling “trillions and trillions of dollars,” Oakley says, charities need to take their time and be smart in working with donors.
“This is a great time to be looking at real estate to make gifts because the market is going to come back, incrementally,” he says. “We have to be more patient than perhaps we have in the past,” he says, “give donors more time, don’t rush their decision, and make them feel more comfortable.”
[The Philanthropy Journal is a program of the Institute for Nonprofits at N.C. State University.]