Donating real estate offers gift-giver a double tax advantage

WASHINGTON - "If I could just burn the place down," many a frustrated seller might think, "my troubles would be over."

Luckily, few people act on such a felonious impulse. And why should they when the fire department would torch the house for them lawfully? Local fire officials gladly accept houses or other structures as donations. Of course, there's a drawback to giving your house away to Sparky and his friends: You won't get any cash for it.

Consequently, if the warm-and-fuzzy feeling you'd get from doing a good deed isn't good enough, you'll have to find another way to unload your white elephant of a house. If, on the other hand, cash isn't your primary objective, donating your property to a tax-exempt charity may be an avenue worth considering.

Actually, people give away real estate all the time. The Giving Institute in Glenview, Ill., estimates that $260 billion was contributed to schools, museums, the Scouts and other groups in 2005, the last year for which such information is available. Roughly 25% of that was in real estate.

Some came from corporations donating real estate they no longer used or needed. But almost $9 of every $10 contributed to charity or other public entities came from individuals.

"Right now, vacation properties and rental properties are the most common real-estate gifts offered to us," said John McKee, director of gift planning at the University of Maryland in College Park.

"With diligence, these properties can be a great way to fulfill charitable goals," he said. Donors can give property either outright or by retaining life-tenancy rights.

Why give your real estate away? Because you can deduct the full value of the property, including appreciation, on your income-tax return. Yet you don't have to report the appreciation as capital gains. In other words, you get two benefits in one.

"It's hard to imagine a better tax-savings device," said Mackenzie Canter III, a Washington, D.C., attorney who specializes in philanthropy law.

Consider this possibility: You're in the top-tier, 35% tax bracket. You own free and clear a house worth $150,000, but you paid only $75,000 for it 20 years ago. Because you've owned it for more than a year, it's considered a long-term capital asset.

If you sold the place outright, you'd have a capital-gains tax liability of $75,000 (assuming it was not your primary residence), and your tax liability would be 15% of $75,000, or $11,250. So the real liquid value of your property is $138,750, or $150,000 less $11,250.

Now suppose you donate the house to a college. You'd be entitled to a charitable-tax deduction of $150,000, and there would be no tax on the $75,000 gain.

In your 35% bracket, the tax savings would be $52,500. So the net cost of making a charitable gift of your $150,000 property would be only $86,250 ($150,000 less your $11,250 tax liability less your $52,500 tax savings).

Your gift is deductible only up to 30% of your adjusted gross income in the year it is made. But any contribution above that amount may be carried over for up to five more years.

Furthermore, donating real estate also avoids the hassles involved with selling: no sales commission, no fix-up costs, no prospects traipsing through your place at all hours and, perhaps best of all, no haggling.

If you need at least some cash out of the deal, consider what's known as a "bargain sale."

With this type of gift, instead of donating the property outright, you sell it to the charitable organization for something less than its full market value. That way, both parties win. You not only get a deduction, you also get some cash, and the charity can sell the place and pocket the difference between what it gave you and what it eventually gets for the house on the open market.

Before signing over your property talk first with an expert in philanthropy law. Not all organizations qualify as tax-exempt charities eligible to receive deductible contributions.

For a complete list of qualified so-called Section 501(c)(3) groups, request Publication 78 from your local IRS office. Also, ask the group you are considering for a copy of its IRS exemption letter.

By Lew Sichelman, United Feature Syndicate
June 10, 2007

Originally published in LA Times 6/11/07.