Charitable Planning in Practice

Gift Options for Real Estate: The Good, the Bad, and the Magic!

Real estate - which may include a personal residence, vacation home, rental property, commercial property, farmland, timber, oil and gas, or an undeveloped tract - is a logical gift choice for many donors because it so widely held and often represents a significant percentage of personal net worth. Over time, the donor's use of the property may change. For example, the donor may choose to downside a personal residence on retirement. Or, he may no longer use a vacation home, finding the property is generating unwanted expenses such as insurance, property taxes, structural maintenance and grounds maintenance. Or he may inherit property he does not intend to use or develop. The Spring 2007 Statistics of Income Bulletin reports donors made 36,454 gifts of real estate exceeding $500; these gifts totaled $3.1 billion and averaged $85,383. (See related article and Table 3 in this newsletter.)

Real estate can be used in a variety of charitable gift forms with the choice depending upon the donor's goals for the use of the gift, the nature of the real estate, and the sophistication of the planner. The most common gift options include the following.

1. Outright gift. An outright gift is generally the easiest to analyze and execute. Assuming the property is environmentally clean and marketable, the charity needs only to sell the property and fund the intended gift purpose (although the charity should count on some delay between date of receipt and sale of the property).
2. Bargain sale. A bargain sale allows the charity to purchase the property at a value less than its market value, with the difference between market value and purchase price representing the donor's charitable gift. This option is especially appropriate if the charity plans to use the purchased property in its ongoing charitable mission.
3. Bargain installment sale. A bargain installment sale adds flexibility for the donor by allowing the creation of a customized installment payment stream for the non-charitable sales price. These payments can even be designed to mimic charitable remainder trust or charitable gift annuity payments to create the desired income stream and spread the capital gains over a period of years. Since the self-dealing rules do not apply to a bargain sale (as they would to a charitable remainder trust), the donor may continue to live in the home (paying rent) while he decides where to go next.
4. Charitable gift annuity. A charitable gift annuity allows the donor to make a gift to charity and receive a lifetime annuity guaranteed by the charity's general assets. While charities rarely accept real estate to create a current-pay charitable gift annuity, many will accept real estate to create a deferred-pay gift annuity. In these cases, expect to negotiate the annuity rate to account for the reduction in gift value resulting from sales costs and the uncertainty of the market value.
5. Charitable remainder trust. Real estate is rarely an appropriate funding asset for a charitable remainder annuity trust (CRAT) unless the trust holds other liquid property allowing payment of the annual annuity and the trust's expenses (such as taxes, improvements, repairs, and administration) before sale. A charitable remainder unitrust (CRUT) with a net income (NICRUT) or net income with make up (NIMCRUT) provision is more flexible. Using a NICRUT or NIMCRUT substantially eliminates the danger of a forced distribution in kind to meet the annual distribution requirement in the period before sale (and the addition of a FLIP provision will allow the trust to convert to a standard CRUT in the year after sale). Donors who fund a CRUT with real estate should be ready to fund the trust with liquid assets to cover basic expenses in the pre-sale period.
6. Pooled income fund. Most pooled income funds do not accept real estate because of the difficulty of accurately determining the property's value, and the expenses and lack of income before sale that diminish distributable net income to all participants. Some charities may be more flexible, however.
7. Retained life interest. A final gift choice may be a retained life interest in a home (including a vacation home) or farm created by the donor's transfer of property title to the charity with the retention of the right to occupy the property for life. This transaction generates immediate charitable income and gift tax deductions for the charitable portion of the transfer while preserving the donor's right to continue to use the property. If the donor decides to leave the property before the end of the reserved period, the legal and equitable interests can be calculated and separated through a joint sale and division of proceeds, the charity's purchase of the donor's interest, or even the donor's contribution of the remaining life interest in exchange for a charitable gift annuity.

These seven gift options, while not exhaustive, may create flexibility and opportunity for your clients. However, gifts of real estate are more complicated than gifts of cash or marketable securities. The next quarterly newsletter will provide a planning checklist to support analysis of the transaction elements.

Note: This Charitable Planning in Practice article is the first of two segments. This quarter, segment one explores real estate gift options. Next quarter, segment two provides a checklist for evaluating gifts of real estate for various charitable purposes.

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