To achieve the tax outcomes and charitable results desired, we’ve outlined an eight-step process that can be followed based on best practices:
- Confirm that the real estate is a long-term capital asset (held for more than one year). The fair market value deduction, versus cost basis deduction, is only available for long-term capital assets.
- Verify that the property is not subject to a mortgage or other debt. Transferring encumbered property triggers important considerations with potentially significant tax consequences.
- If your client has not yet established a charitable fund, work with the team of giving experts at CFT to structure a donor-advised or other type of fund to receive the asset. The deductibility rules are different for gifts of real estate to a public charity versus a private foundation. Some clients may not be aware of these caveats, especially if your client is close to transferring real estate to a private foundation. This type of transaction could result in missed tax savings.
- Determine whether or not the property produces income and discuss this with the team at CFT. Income-producing real estate can potentially generate unrelated business income tax (UBIT) for CFT. Although there are exceptions and strategies to minimize UBIT’s impact, it is important to address this issue as soon as possible.
- Discuss with our team to learn if an environmental audit is required for the property.
- Verify that the client has not entered into discussions about an imminent sale of the property. Even if CFT can sell the property shortly after receipt and deposit the proceeds into your client’s fund, your client cannot have a pre-arranged sale. Doing so could negate some of the benefits of the transaction.
- Ensure that your client obtains a qualified appraisal at the right time to determine the fair market value of the property. This is necessary to obtain a tax deduction. Additionally, the appraised value must be reported to the IRS on a Form 8283 strict compliance with IRS rules.
- Finally, transfer the property to CFT with the appropriate legal documents, including a deed.
A gift of real estate can be a beneficial tool for both your client and the nonprofits they support through their fund at CFT. Our team would be happy to support you through each step of the process, ensuring that your clients’ philanthropic goals are met with expertise, professionalism, and care.
Communities Foundation of Texas is here to help you help others, serving as a trusted resource for you as you support your clients and their philanthropic goals. This article is provided for informational purposes only and is not intended as legal, accounting, or financial planning advice.
