Real estate makes an attractive gift to an organization for a donor because it’s a way to give a significant amount, and there are no capital gains to the donor. But acceptance of a real estate gift can be complicated by things such as environmental issues or liabilities. Unless the organization plans to use the real estate donation to further the nonprofit’s mission, it is typically best to sell the real estate upon receipt.
Here are some things to think through regarding receipt of a real estate gift:
- If you don’t have one, set up a gift acceptance policy for real estate. Determine what type of real estate you will accept, such as residential, commercial, raw land, or farm/ranch land. Also determine the gift structure, such as straight gifts, bargain sale or charitable remainder trust. (See explanation below for gift structures.)
- Determine procedures for evaluating real estate. For example, designate a person or persons who will do the due diligence and communicate with the donor.
- Understand that there will be costs associated with due diligence to investigate clear title, assess environmental issues, assess market value and perform building inspection (if applicable).
- Properly prepare the gift acceptance letter to be sure that all details are covered, including any conditions placed on the gift. Earlier in 2012, the U.S. Tax Court disallowed a $4.5 million real estate donation to a charity because the substantiation letter was incomplete (Cohan v. Commissioner, January 10, 2012).
Here is an explanation of gift structures:
– Straight gift – Real estate property is given directly to the organization. If the property is free and clear, the donor receives a charitable contribution in the amount of the full appraised value of the property. (The rules are different if being donated to a private foundation.) If there is a mortgage or liability, the tax deduction is limited to the donor’s equity in the property, and generally limited to 30% of the donor’s AGI. Either way, the donor avoids a capital gains tax with the donation.
– Bargain sale – The property is sold to the charity at less than the market value. The donor receives a tax deduction for the difference between the market value and the sales price.
– Charitable remainder trust – Property is deeded into a trust which pays the donor an income for the donor’s lifetime. When the donor dies, the charity fully owns the property.
Most importantly, do your homework before and during an opportunity to receive a real estate donation. And follow through in a way that protects both your organization and the donor.