Real Information on Real Estate Gifts
Let the Land do the Work
Land ownership has always been part of the American Dream. On farms across the country, the hope was to work the land and prosper. Now, working the land may mean developing it or renting it or simply holding it, but the popularity of real estate as an investment asset remains high. Land and its improvements account for 30-40% of the average individual’s net worth.
Real estate as an investment asset
Like other assets, people usually invest in real estate expecting growth, income or some combination of the two. Land can be an outstanding growth investment, steadily increasing in value over time. In fact, it may be the most highly appreciated asset that many people own. Unfortunately, that appreciation can create problems if the owner decides to sell the land or give it to a family member.
Land can be an excellent income investment, too. Sometimes, however, income expectations from rental or farm properties can be frustrated by the costs associated with ownership (such as taxes, insurance and maintenance).
Unique benefits from charitable giving
For some, an investment in real estate may have outlived its usefulness. A gift to the Boy Scouts might provide relief from management burdens and a welcome tax deduction for the property’s fair market value. In addition, the gift can usually be structured to create an income stream for the donor or members of her family.
Ways to Make a Real Estate Gift
An outright gift of real property generates a charitable income tax deduction equal to the fair market value of the property. The gift also removes the property from your estate and, where appreciated property is gifted, generally avoids capital gains tax.
Timing can be important in real estate gifts. Retaining a life estate allows you to finalize the gift but keep the use of your property for the rest of your life. Though the council has no right to use or possess the property until after your lifetime, you receive an immediate income tax deduction for part of the property’s value.
Wills and Bequests
Another way to make sure you have the property if you still need it is to simply make a specific bequest in a will or codicil. This doesn’t provide any current income tax benefits, but such a gift can help with estate taxes by removing the property from your probate estate at death. Meanwhile, you can still use the property during your life.
Gift Sale or Bargain Sale
It’s possible to give a partial interest in land instead of donating the entire property. When the property is sold, the proceeds are distributed accordingly. This type of transaction is called a “gift sale.”
A bargain sale might be another option: selling the property to the council for less than its fair market value. This kind of transaction is part sale and part gift. The council gets a good deal; the donor gets sale proceeds and a tax deduction for the difference between the sale price and the property’s value.
Charitable Remainder Trust
These can be one of the best vehicles for gifts of real estate. If the property is income-producing, a charitable remainder unitrust can pay out the income earnings from the property to the income beneficiaries of the trust. If the property is not income producing (such as undeveloped land, or a vacation home), then the trust can sell the property and invest the proceeds in something that generates income.
What Kinds of Real Property Might be Contributed?
A Personal Residence
Homes are the most common type of real estate, although not necessarily the most valuable. When a home is no longer needed, or if it is needed only for a limited duration, a residence may then be an appropriate gift.
A Vacation Home
As time passes, many people discover that a family vacation home is no longer used, because the family has grown or the location is no longer convenient.
Potentially the most valuable real estate, commercial property raises complex issues. Environmental concerns, limited marketability, and sources of financing may be associated with the property. Nonetheless, commercial property generally produces income, which may eliminate the need to immediately sell the property to create an income stream.
Raw land may be an appropriate gift to the council, particularly if it has development potential. Developable raw land includes:
Farmland– which may not have immediate development potential, and may have a narrow market and/or zoning restrictions. Nonetheless, farmland remains attractive as a charitable gift, since its value is based on its existing use and not on a future change in status.
Undeveloped Commercial Property – which may be donated to the council at any stage: from agriculture, to groundbreaking, to fully developed and ready to lease. The issues at each stage are complex, both to the council and to donors, and competent legal counsel should be consulted.
Issues to Consider
Environmental Issues: Should be identified and addressed before a gift is made or accepted.
Marketability Issues: Must be considered, particularly if the donor is interested in an income stream. To generate the income, the property generally must be sold fairly soon after the gift is accepted.
Valuation Issues: Must be resolved to ensure that the deduction is upheld. Be sure you know the property’s appraised value, and your basis in the property.
Mortgaged Property: Generally does not make a good gift. The charitable tax deduction is reduced by the mortgage amount and the donor is treated as having taken an equivalent amount into income, no matter who is responsible for the debt.
For More Information
Thank you for your interest and continuing support of Scouting. We would be pleased to visit with you or your advisors about gifts of real estate or other gift ideas. You may also want more information about what Scouting and your local council is doing for our youth and community. Feel free to contact us as follows:
Three Fires Council
415 N. Second Street
St. Charles, IL 60174
Neither the author nor this organization is engaged in rendering legal or tax advice. Rather, this publication is intended to provide only information of a general character. Both state and federal laws may apply in certain situations, and may change periodically. For advice in specific cases, the services of an attorney or other professional advisor should be obtained.