CHARITABLE GIFTS OF REAL ESTATE
Here are some key principles that underlie the specific advice I provide to my clients who are thinking of making charitable gifts of appreciated real estate to recipients of their choosing. These general principles may apply to specific facts and circumstances in unique ways, so please do reach out for an individual consultation if you would like to explore your options with me.
- Dates Back to 1917. The charitable deduction was enacted in 1917. The individual limit has increased over time to the present cap of not more than thirty percent of an individual’s contribution base (the “30% Level”). Any annual charitable gift in excess of the 30% Level is subject to a carryover to the succeeding five (5) years.
- Charitable Intent Required. A charitable gift must proceed from the detached and disinterested generosity of the taxpayer. The fact that federal income tax benefits are a consideration will not undermine the validity of a charitable contribution.
- Importance of Holding Period. If appreciated real estate (the “Donated Property”) has been held for a period of one (1) year or less, the charitable deduction will be limited to the cost or adjusted basis of the Donated Property, and not its fair market value.
- Inventory Items. If the Donated Property constitutes inventory held for sale to customers in the ordinary course, the charitable deduction will also be limited to the cost or adjusted basis. Since similar language is used to determine if real estate is eligible for like-kind exchange treatment, or to determine if real estate is eligible for capital gains, those provisions of the Code may be relevant.
- Valuation of Donated Property. Subject to the rules about holding period and inventory, the taxpayer (the “Donor”) will be entitled to a charitable deduction equal to the fair market value of the Donated Property. The fair market value is also the highest and best use (the “HBU”) of the Donated Property. The HBU is estimated by an appraiser (the “Qualified Appraiser”) meeting certain requirements set out in the Code and Regulations. The HBU of the Donated Property can be of major disagreement between the IRS and the Donor.
- Reporting and Substantiation of Gifts. The principal reporting and substantiation requirements for a gift of the Donated Property are: (1) a written contemporaneous acknowledgement from the organization that received the gift (the “Qualified Organization”); (2) an appraisal completed by the Qualified Appraiser; and (3) an IRS Form 8283 Noncash Charitable Contribution statement signed by the Donor, with the declaration of the Qualified Appraiser, and acknowledged by the Qualified Organization.
- Subsequent Disposition by Charitable Recipient. If the Qualified Organization disposes of the Donated Property within three years after the gift, the Qualified Organization must file a statement with the IRS and Donor. It is possible that the IRS can be alerted to material differences between the Donor’s claimed value of the Donated Property and the facts concerning the subsequent disposition.
- Comparison of Gifts and Conservation Easements. It is anticipated that a forthcoming edition of this Report will compare and contrast true charitable gifts of real estate with conservation easements. See also the Summer 2023 Newsletter regarding Conservation Easements by Pass-Through Entities.
More In-Depth Study Is Available. This Newsletter is also available as a more detailed In-Depth Study. If you, or someone you are in contact with, have an interest, please contact us. If you have questions about any real estate or federal income tax topics, we can schedule a call to discuss your concerns.
No Legal Duty Is Created. This Newsletter is for general information only and does not create any relationship between the William R. Sylvester Law Firm, LLC, or William R. Sylvester, and any other person or entity. A legal relationship will arise only on the mutual execution of a written retainer agreement.
SPRING 2024