Establishing a Charitable Fund

There are many ways to donate real estate. One option is to donate the property to a fund at your local community foundation and use the proceeds for charitable giving. Then, when you make gifts from the fund, you can remain involved in determining which organizations receive gifts and when. In addition, you may be able to appoint children or family members as successor advisors to your fund to ensure grant-making continuity after your death.

Making a gift through your community foundation benefits you by providing a charitable income tax deduction for the full fair market value of property held for more than one year—a greater tax benefit than you would receive by donating to a private foundation. In addition, you avoid capital gains taxes that would have occurred at the sale of the property or potential future estate taxes on the property.

Getting Started

Here are answers to common questions that many people thinking about or in the midst of donating real estate have asked.

Q: Do I need an appraisal?

A: Yes, to get an income tax deduction, you must have a qualified real estate appraisal completed 60 days before it goes into your fund or a charitable remainder trust. Typically, the donor pays for this official evaluation of the property’s value. However, most nonprofits will allow this and other related costs, such as repairs, security, taxes, and assessments during the sales period, to be deducted from the net amount received.

Q: Can I give a property that carries a mortgage?

A: Yes, depending on the percentage of mortgage to fair market value. Community foundations that accept real estate may accept encumbered property up to 25% of the fair market value. However, donating encumbered property will lessen your tax benefits. One way around this might be to work with the lender to see if they would accept another piece of collateral in order to issue a reduced loan.

Q. Can I receive a lifetime income stream from a gift of real estate?

A. Yes, if you establish a charitable remainder trust that pays you a life income stream. The income beneficiaries annually receive an amount equal to a fixed percentage of the trusts fair market value (unitrust) or a fixed dollar amount (annuity trust). The income stream becomes available only after the property is sold.

Q: Is it possible to donate real estate, but retain the right to use or live in my personal residence during my and my spouse’s life?

A: Yes, if you create a life estate reserve with your community foundation. This type of transaction creates a partial income tax deduction and also accomplishes the other benefits of a real estate transaction.

Q: If I am giving property through a bequest, can I also donate the contents of a house, and ask the recipient to serve as executor?

A: Community foundations welcome a house, its contents and the entire estate as charitable donations. However, it is generally more practical to have a law firm fill the function of executor. If you are leaving items of value, make sure that you authenticate or at least list their estimated value so that they can be resold at an appropriate price.

Q: When the property is sold, is the sale reported to the IRS?

A: Yes, if the sale occurs within two years of the gift, the community foundation will file IRS Form 8282 noting the actual amount received from the sale.

For more information on donating property call on the experienced staff at your local community foundation.