Advisor's Corner

Red hot real estate: Structure smart gifts to charity without getting burned

The housing market is showing no signs of slowing down in 2021. For certain clients, this presents a strong opportunity for charitable gifts of real estate, whether a primary residence, second home, rental property, or even niche commercial property that has benefited from a multi-faceted pandemic marketplace.

As is the case with gifts of other long-term capital gains assets, gifts of real estate to a charity can be extremely tax-efficient. Whether your client is giving a second home, rental property, or commercial property to a fund at Arkansas Community Foundation, the client may be eligible for a charitable tax deduction of the fair market value of the property. Because the Community Foundation is a public charity, when the property is sold, the full amount of the proceeds less fees will remain in the fund—not subject to income tax. 

Gifts of real estate to charity should not be undertaken lightly. If your client is considering a gift of real estate to charity, consider working closely with Arkansas Community Foundation to ensure that the transaction is properly structured. 

Our team at Arkansas Community Foundation can help you navigate the rules for gifts of real estate such as:

  • how to determine valuation,
  • dealing with debt on the property,
  • how to substantiate value and properly report the transaction on Form 8283,
  • when and to what extent minority interest discounts may apply,
  • how to avoid a “step transaction” due to a prearranged sale, and
  • determining whether unrelated business taxable income (UBTI) will be a problem.

Our team would be pleased to work with you and your client in utilizing their gift of real estate to benefit their favorite charities through either a Designated Fund or a Donor Advised Fund. Contact us!

Unlocking the power of clients’ real estate: Why the bargain sale is a must-have in your charitable planning toolkit

The bargain sale, frequently heralded as the earliest charitable giving vehicle, results in the real estate owner serving in both the role of a seller for the cash portion of the sale to a charity, and also in the role of a donor for the donated portion of the property. A benefit of using Arkansas Community Foundation is that we are well versed in bargain sales and can create a charitable fund that will benefit many charities that your client cares about on their timeline.

As is the case with many types of charitable gifts, establishing fair market value of the subject real estate is critical and requires a qualified appraisal that complies with IRS regulations. Establishing the fair market value in turn determines the charitable donation portion, which is the difference between the fair market value and the lower cash amount paid by the charity to the donor/seller.

A post-pandemic world may create new opportunities for your clients to consider bargain sales of property to charities. Indeed, nearly $430 billion in commercial and multifamily real estate debt is set to mature this year, opening up conversations about what property is really worth and how owners can most efficiently unlock its value. And of course, bargain sales are not limited to commercial property. The U.S. housing market is estimated to have gained more than $2.5 trillion in value in 2020 alone, bringing the total value of housing in the U.S. to over $36 trillion. Call us at Arkansas Community Foundation and we can talk you through effective strategies.