Outright Gifts
With the continuing increase in property values, many people find that their real estate is their greatest asset. But these assets often carry a high price: property tax and maintenance costs, if held; capital gains tax, if sold. A gift to Scouting of property residential, rental, vacation homes, farms, commercial, undeveloped, or even land rights such as oil, gas, water and mineral rights may offer significant benefits.
Generally, outright gifts of real property entitle you to:
- A charitable income tax deduction based on the fair market value of the property.
Example: A donor invested $20,000 in a piece of land many years ago. It is now worth $100,000. If he contributes it to his local council, he is entitled to a deduction of $100,000 on his income tax return. Also, he will not owe the capital gains tax which would be due had he sold the property (a savings of $16,000).
Before deciding on a gift method, you will need to know: 1) the appraised value of the property; 2) your basis and any debts or liens on the property; and 3) your plans for, and any family interest in, the property. Also, discuss your gift with the council to determine how or if the property will be used in its program or if there are any environmental concerns.
As with gifts of stocks and bonds, land held for more than one year is deductible up to 30% of a donors AGI for the year. If held for less than a year, it is deductible up to 50% of AGI for the year, but the deduction will be limited to the propertys cost basis. The five year carryover rule applies here as well.
Property with a mortgage or lien usually does not make a good gift. The tax deduction will be reduced by the debt amount, and the donor is also treated as having taken a similar amount into income, regardless of who is responsible for the debt.
Bargain Sales
A gift of real estate does not have to be an all-or-nothing proposition. You may donate a partial interest in the land or any accompanying land rights instead of donating the entire property. You receive a deduction based on the appraised value of the interest you donate. When the property is sold, the proceeds are distributed accordingly. This is referred to as a gift/sale arrangement.
Example: A donor has a ten acre parcel of land worth $100,000. She is concerned about giving away the entire property. She instead donates three acres of it to her local council. She gets a deduction of $30,000 right away and, when the property is sold, the council gets 3/10ths of the sales proceeds (the donor gets the other 7/10ths). Its also very possible that her tax deduction will completely offset the capital gains tax she will owe on her part of the proceeds.
Another option is the bargain sale. Just like it sounds, its where a donor sells the property to the council at a bargain; its part sale, part gift. The council gets a good deal and the donor gets a tax deduction for the difference between the sale price and the value of the property.
Example: A donor has a property worth $150,000. He wants to help his council, but cant afford to give away the entire property. He agrees to sell it to the council for 1/3 of its value. He gets $50,000 cash (either all at once or over time), a charitable tax deduction for $100,000, and owes capital gains tax only on his pro rata share (1/3). The council gets a property worth three times its price and can do whatever it wants to with it.