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Gifts of Land and Real Estate
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April 15, 2024
Gifts of land and real estate have proven of great value to the Catholic Church. A number of our present day parish churches, schools, and ministries have been constructed on land which was donated to the Archdiocese in years past.
Gifts of land and real estate gives the donor tremendous tax benefits, due to the high appreciation value of land in this area.
Two main benefits of gift of land or real estate include:
1. Donors are entitled to an income tax contribution deduction based on the full market value of the property.
2. Donors gift does not trigger liability for capital gains tax.
There are several reasons why you might consider a gift of property. Here are some case examples:
Example 1: George's Land and the Developers
George purchased property 10 years ago for $200,000. It was vacant land in a commercial area and now has a value of $400,000. George contacted his CPA, Susan, because he had received some inquiries about the property from a developer and is considering selling it. However, George is concerned about the tax he will owe on the sale of the property.
George: "If I sell this property, will I have to pay a large tax?"
Susan: "Yes, you will have to pay the federal capital gains tax plus a state capital gains tax. You should also consider that you have already sold another property and have a very large capital gain this year."
George: "What would happen if I give this property to charity?"
Susan: "You can transfer a property to charity the same way that you would sell the property, by signing a deed to transfer the property to the charity. The deed will be recorded and you can qualify for a charitable deduction. The $400,000 deduction would offset a substantial part of your gain. We might be able to offset the entire capital gains tax payable on the other sale that you completed earlier this year. In addition to your income tax deduction that will offset tax on that other sale, you bypass the gain on the gift of this property. With both tax benefits, you will save about $200,000."
George: "Great! That's almost as much as I paid for it in the first place. Plus, I could help my favorite charity with a very nice gift this year. That sounds like just the ticket for me."
George contacted his favorite charity and deeded the land to that nonprofit. He was careful to be certain that he had not signed a contract or agreed to a sale of the property before the gift. After the deed was recorded, the charity then made contact with several developers and sold the property for $200,000.
Example 2: Bob's Declining Depreciation Solution
Another gift option could be a gift of a commercial property. Bob bought a small commercial building 14 years ago for $200,000. His CPA Tim took straight-line depreciation and his cost basis in the building is now $120,000. Fortunately, over that period of time the property appreciated to a value of $320,000.
Bob owns many rental homes and commercial buildings and receives rental income on those properties. Because he has owned them for quite a few years, the depreciation deductions are now lower and his rental income continues to go up. As a result, Bob now has a large income and pays a huge income tax.
Bob Meets with His CPA Tim to Discuss his Plans for This Year
Bob: "You know, Tim, I keep getting better rents every year, but I now have less and less depreciation. The income taxes are going to wallop me this year."
Tim: "Yes, Bob. Because you've owned properties for quite a long period of time, your income is now much more than the depreciation and your taxes are going to be much higher."
Bob: "Well, maybe I should just give this rental home to my favorite charity. They are in the middle of a fairly large fund drive and could sure use the gift. Would that help?"
Tim: "Yes, you would receive a substantial deduction. The current value of that building is about $320,000. That deduction could save taxes this year, and perhaps for the next two or three years. You can take that kind of charitable deduction over as many as six years. Based on your tax situation, I think you could take the deduction over about three years. This would save over $100,000 in income taxes. In addition, by giving it to charity you would not pay tax on the $200,000 of gain in that rental home, which represents a savings of another $40,000 or more."
Bob: "This sounds like a very good plan. I have been looking for ways to reduce my taxes and help my favorite charity. Let's go ahead and do this."
Appraisal Requirements
George and Bob both decided to make gifts of property to a favorite charity. These gifts will offset the large capital gain for George and the higher income for Bob. However, for a gift of property valued at more than $5,000 they will need a qualified appraisal.
Their CPAs secured the services of Arnold Appraiser. He is certified as a Member of the Appraisal Institute (MAI) and specializes in real estate appraisals. Arnold appraised both properties and gave the two CPAs the appraisals, complete with comparables and other important appraisal information.
CPA Susan and CPA Tim also had the charities and Appraiser Arnold sign an IRS Form 8283. This form is necessary to qualify them to report the charitable deductions on their tax returns.
After making these two gifts of property, George and Bob enjoyed both major benefits. They saved very substantial income taxes and also bypassed the capital gain on the property that was gifted. A gift of land can be a fine gift with great benefits both for the donors and for the charitable organization.
