Red hot real estate: Structure smart gifts to charity without getting burned

Red hot real estate: Structure smart gifts to charity without getting burned

The housing market is showing no signs of slowing down in 2021. For certain clients, this presents a strong opportunity for charitable gifts of real estate, whether a primary residence, second home, rental property, or even niche commercial property that’s benefited from a multi-faceted pandemic marketplace.

As is the case with gifts of other long-term capital gains assets, gifts of real estate to a charity can be extremely tax-efficient. Whether your client is giving a second home, rental property, or commercial property to a fund at the community foundation, the client may be eligible for a charitable tax deduction of the fair market value of the property. Because the community foundation is a public charity, when the property is sold, the full amount of the proceeds will remain in the fund--not subject to income tax. 

Gifts of real estate to charity shouldn’t be undertaken lightly, though; certain pitfalls and missteps can have a devastating tax impact. If your client is considering a gift of real estate to charity, consider working closely with the community foundation to ensure that the transaction is properly structured. 

The team at the community foundation can help you navigate the rules for gifts of real estate. such as how to determine valuation, dealing with debt on the property, how to substantiate value and properly report the transaction on Form 8283, when and to what extent minority interest discounts may apply, how to avoid a “step transaction” due to a prearranged sale, and determining whether unrelated business taxable income (UBTI) will be a problem.

Finally, if your client would like the gift of real estate to benefit one or more favorite nonprofit organizations, the community foundation can help facilitate a transfer into a donor-advised fund, from which your client can recommend grants to the charity or charities after the property sale is complete.