Real property investor Louis Glickman quipped, "The best investment on Earth is earth." In recent years, markets have bolstered his point with prices soaring to historic highs in many locales.[1] We have all heard the adage, “buy low, sell high.” For your clients who are charitably inclined and own appreciated property, it rings equally true “to buy low and donate high,” as this has the double bonus of increasing your clients’ tax savings and maximizing the impact of the clients’ gifts overall. While buyers lament the current accessibility and cost of purchasing property, in the current seller’s market, donors and charitable organizations alike reap substantial rewards from real property donations.

Real property is one of the most commonly owned asset types, which makes donations of real property interests an option for many potential clients, regardless of their net worth. Clients on the higher end of the wealth spectrum are more likely to complete gifts during their lifetime, whereas estates, both large and small, remain excellent candidates for a gift made at death. In the United States, real property comprises a significant portion, if not the bulk, of most portfolios. According to the U.S. Census Bureau in 2021, on average, for individuals not in the top 1% of wealth, equity in one’s own home was the second largest asset they owned at 28%.[2] When combined with rental properties and other real property holdings, the percentage is higher at a whopping 37% and exceeds retirement accounts as the otherwise leading asset type.[3]

This article will emphasize various factors to consider when clients express a desire to donate real property interests. Additionally, it will provide an introductory overview of giving solutions available for real property that can be tailored to accomplish your client’s specific charitable, income and tax objectives.

COMMON INCENTIVES FOR DONATING REAL PROPERTY TO CHARITABLE ORGANIZATIONS

Author Margaret Mitchell famously wrote, “Death, taxes and childbirth! There's never a convenient time for any of them.”[4] Many of your clients likely share this sentiment and have a strong aversion to paying tax when it could be legally avoided and is otherwise to their advantage. The Internal Revenue Code and underlying regulations state specific requirements for substantiating a charitable contribution income tax deduction for gifts of real property worth more than $5,000.[5] Under the Oklahoma Rules of Professional Conduct as well as the rules for practicing before the IRS, you have duties as an attorney to counsel your client regarding these requirements so as not to jeopardize the client’s eligibility to claim a charitable contribution income tax deduction.[6]

Gifts of real property are amongst the most impactful and tax-efficient avenues to support charitable organizations. Property owners who have held assets for significant periods of time often find themselves facing substantial capital gains tax liabilities at the time of sale.[7] Rather than pay these hefty taxes, many philanthropically oriented clients prefer to instead make a gift to a charitable organization, itemize their deductions at filing and claim a deduction for charitable contributions.[8] In some cases, the donor may carry the deduction forward for as many as five years.[9]

Statistically, advisors overestimate the importance donors place on tax advantages of charitable contributions in their decision-making process, though it is still self-reported as an influential factor.[10] In reality, a wide range of motivations may coalesce to spur the client to donate real property, chief among them the desire to make a difference. The following nonexhaustive list enumerates reasons frequently cited for making a charitable gift of real property:

• Donors own property they no longer wish to manage or maintain. They may feel burdened by the stress, expense and time associated with owning the property.
• Donors plan to retire and will no longer need the income from farmland or commercial property for business operations.
• Donors either do not have children or do not anticipate their children using or needing the property.[11]
• Donors move to a retirement community and no longer need their personal residence during their golden years.
• Donors own a vacation home they no longer frequent.
• Donors would like to convert the real property into an income-producing gift for themselves, with the remainder going to charity.
• Donors would like to retain the use and enjoyment of the real property in their lifetime but would prefer to make a current gift of the remainder interest in the property after their passing in order to receive an immediate tax benefit.
• Donors fear they may outlive their savings and wish to postpone a donation of property at their passing when they know with certainty they will not need resource access.
• Donors hold real property they desire to sell, but that has appreciated, and they face undesirable tax consequences associated with long-term capital gains.
• Donors wish to receive a charitable tax deduction for the gift of property.
• Donors with significant assets face estate taxes and wish to reduce the size of their taxable estate.[12]

KEY FACTORS FOR FACILITATING GIFTS OF REAL PROPERTY 

Real property gifts are generally deemed one of the more complex asset classes to donate. Many charitable gifts are relatively elementary and virtually instantaneous transactions. In contrast, gifts of real property entail many nuances and include a series of steps required by both the IRS and the internal gift acceptance policy of the charitable organization or community foundation. The following considerations are crucial to keep in mind when counseling clients and engaging with the other individuals or organizations involved:

Property Gifts Come in All Shapes and Sizes

Virtually all real property types are eligible for tax-advantaged giving, though not all types are eligible for each charitable giving arrangement. Examples of real property interests eligible for donation include primary residences, rental properties, investment properties, vacation homes, agricultural properties, commercial properties, raw land or undeveloped properties and mineral or leasehold interests.

Thanks, but No Thanks

Certain property types will often be refused as noncompliant with the charitable organization’s gift acceptance policy. Commonly rejected property interests include cemetery plots, timeshare interests, gifts with stringent restrictions on use, debt-encumbered property and properties deemed unmarketable or hazardous.

The Earlier, the Better!

It is of paramount importance to consult the beneficiary charitable organization or community foundation as early as possible in the process. When making a gift of property that has appreciated, the best practice is to engage in advance of even discussing the sale of the property with a potentially interested buyer and especially before formally listing the property for sale. If it is deemed by the IRS that there was a “buyer in the wings,” the IRS may assert the anticipatory assignment of income doctrine, and the client may risk eligibility for the maximum tax benefits possible.[13]

All is not lost if a buyer has already been confirmed or if the client has sold the property in advance but desires to still make a gift. However, while there are still advantages to gifting the proceeds from a sale of real property after the fact, in most cases, they pale in comparison to the tax benefits associated with gifting the asset first.

HALF A LOAF IS BETTER THAN NONE[14]

While Frank Sinatra might have famously crooned that he wants it “all or nothing at all,” this is simply not true for most nonprofits.[15] There are several ways a donor can gift real property without entirely relinquishing the benefits of their investment. The following options outline an array of giving solutions that may serve a client wishing to retain an income, access or ownership interest.

Whole-y Cow! Fractions are Fun[16]

Clients may elect to donate a fractional interest in the property in lieu of the whole ownership interest. To qualify for a charitable contribution deduction, it must be a gift of an undivided interest in the donor’s entire interest in the property.[17] This can be done simply by deeding the fractional interest to the charitable organization. If the transfer is intended to occur at death, the attorney should draft accordingly in the estate plan or otherwise in a transfer on death (TOD) deed. Typically, charitable organizations favor providing preferred gift language. This practice may be done anonymously and generally proves helpful to the client, the attorney and the charitable beneficiary.

Let’s Make a Deal! Bargain Sale Benefits

Bargain sales benefit donors wishing to receive compensation for a portion of the sale price. In these instances, the donor sells the property to a charitable organization at a discount. For example, the donor conveys the property to the charitable organization for a portion of the fair market value (FMV). The seller then receives a charitable income tax deduction for the amount that was discounted below FMV.[18]

Charitable Trusts: ‘Tis Better to Give AND Receive

Donors may also let the charitable organization “borrow” the property benefits for either a term of years or for the donor’s lifetime by creating a charitable lead trust (CLT). With CLTs, the property will either revert to the donor’s heirs at the donor’s passing or back to the living donor (or other specified recipient) at the end of a stated term of years.[19]

Conversely, with a charitable remainder trust (CRT), the donors may desire to make a gift and retain the right to receive payments (for themselves or up to eight of their loved ones) during either their lifetimes or for a specified term not exceeding 20 years.[20] At the expiration of the term or the death of the donor(s), the remainder interest benefits the charitable organization. Testamentary CRTs provide a posthumously funded option to provide income to the client’s loved ones and ultimately fund a charitable purpose.

Contributions to a CLT or a CRT will receive a charitable contribution deduction for the actuarial value of the interest passing to charity.[21]

‘Til Death Do Us Part: Retained Life Estates Are Great!

Retained life estates allow the donor to receive an immediate tax deduction while retaining the use and enjoyment of the property during their lifetime. A common example is an elderly client who wishes to live out their days in their own home but is charitably inclined. At the death of the surviving spouse, the charitable organization will have the right to occupy or liquidate the property. This option is available for residential property and farms. The attorney should draft a formal gift agreement outlining who is responsible for property costs incurred during the donor’s lifetime and other important details.[22]

STOP, COLLABORATE AND LISTEN![23]

Attorneys ought to remember the wit and wisdom of Will Rogers when he remarked, “Everyone is ignorant, only on different subjects.”[24] Relying on the proficiencies of various professionals is often essential to reaching the best result for your client.[25] Oftentimes, a task force contributes their respective expertise throughout the process due to the nature and complexity of this gift type. The typical cast of characters includes the client, the client’s attorney, a qualified appraiser, a property inspector, the client’s financial advisor, the client’s accountant or tax advisor or a representative from the beneficiary charitable organization.

Confidentiality and Conflicts

As always, honoring client confidentiality remains a core component of our code of ethics as attorneys.[26] The attorney should, in many cases, request a client’s permission in the form of written informed consent before discussing the client’s affairs with other parties.[27] As a practical matter, with so many moving parts and parties in these transactions, it is helpful to have clear lines of communication in place to ensure priorities are understood, deadlines are agreed upon and the expectations of all parties align.

Occasionally, clients fall under the mistaken assumption or impression that the charity’s attorneys represent the client in place of the charitable organization itself. It is important to reinforce that you represent the client’s interests, and while the client’s and charity’s goals may align for this purpose, the charitable organization’s attorneys represent the charitable organization generally and not your client personally.[28]

We’re Better Together[29]

Collaboration with a charitable organization, most commonly a facilitating community foundation, is largely recognized as a best practice. The joining of professional and philanthropic forces helps ensure both the client’s and the charitable organization’s needs are met. This partnership may grant access to the charity’s planned giving expertise at little or no cost to the attorney or client and serve as an intermediary at times between the ultimate charitable beneficiary and the client. Depending on internal policy and the client’s wishes, the charitable organization may quarterback the property transfer process. Even with anonymous gifts, the charity’s staff will often coordinate with the client’s advisors and attorneys to facilitate the requisite legal work and tax analysis.

The Best Things in Life Are Free (Mostly)

Community foundations will eagerly provide complementary guidance and services at no upfront cost to the client or the attorney. In many cases, these complementary services are eventually funded by asset management fees on the gift corpus when it is ultimately held in endowment or as another charitable instrument.

Services commonly rendered include supplying charitable gift language for estate plans and gift agreements, generating tax calculations, crafting comparative gift type assessments, naming rights agreements and drafting gift contracts for lifetime gifts. For legacy gifts made within estate planning documents, the community foundation will likely provide recommendations, but the instruments should be drafted by the client’s independent counsel.[30]

GIVING WITH STRINGS ATTACHED: BEST PRACTICES FOR RESTRICTED GIFTS

More often than not, gifts of real property are sold to fund the mission of the charitable organization rather than maintained and managed by the charitable organization itself. Frequently, a client envisions a “perfect use for this property” that, in reality, is not a viable option for the recipient charitable organization. For example, the donor owns a property they want developed and used for a certain purpose. Even in instances when this is possible in the near future, it is often impossible to guarantee this use can continue long-term and that the property will not need to be used for a different purpose in the future or be ultimately sold.

Additionally, the use the donor desires may require an additional gift of capital to maintain the property, build new structures, renovate existing structures and/or sustain new program components. While these restricted gifts can occasionally be accommodated, commonly, it is either impractical or impossible. It will help your client anticipate and understand the reasoning behind the likely response if you alert them to the possibility (if not probability) that the charitable organization will only accept the property if it can be liquidated or is accompanied with additional funds.[31]

In the rare instance the donor has a specific restriction for the property in mind and the charitable organization has verified that the donor’s intent can be honored, it is a best practice for the attorney to draft a legally binding gift agreement that is signed by the donor and the charitable organization that identifies the circumstances when the restrictions may be terminated.

STEP BY STEP[32]

Property donations can prove an excellent source of revenue for charitable organizations. However, these gifts entail a higher level of administrative support to review, accept and, in most cases, ultimately liquidate. The following steps and stages in the gift process are important for the attorney to remain apprised of when counseling clients.

Real Property Gifts Often Take Months, Not Minutes

If the donor would like the gift to take place in a certain tax year or season, it is important to plan ahead and allow at least two to three months to complete this type of gift. There are numerous legal and tax factors to consider, and several parties are involved in these transactions. Gifts taking place near year-end may require additional time because of heightened demand on advisors’ time, holiday office closures and vacation schedules for various professionals. Of note, the property does not need to be sold by the charitable organization in the same year as the gift for the donor to receive a deduction.

Risky Business: The Prudence of Property Inspections and Due Diligence

Unlike many other asset types, accepting real property donations exposes the charitable organization to a level of risk. For example, if the property takes a lengthy period to sell, it may incur sizeable maintenance and insurance costs. Alternatively, there may be some sort of undiscovered liability or environmental hazard that needs to be remediated. To minimize those and other risks, in advance of accepting real property donations, some charitable organizations will require property inspections and disclosures, occasionally via the completion of a detailed information gathering form or signed affidavit. The charitable organization will often then determine whether or not to accept the gift.

Qualified Appraisals for Property Worth More Than $5,000

For donors who wish to itemize and claim a charitable contribution income tax deduction, the IRS requires an independent, qualified appraisal to determine the property’s FMV.[33] Timeliness is of the essence, and the appraisal must be dated no earlier than 60 days before the date of the property transfer or later than the due date of the tax return where the charitable contribution deduction is first taken or on the date of any amended tax return that first reports the charitable contribution deduction.[34] The IRS takes the position that the taxpayer cannot take a charitable deduction for the appraisal expenses.[35]

Include the Charity’s Taxpayer/Employer Identification Number in the Gift Language and Deeds

The attorney should document the charitable organization’s taxpayer/employer identification number (EIN). The charitable organization can provide this information directly, or alternatively, it can be looked up on the IRS website or at Guidestar.org.[36] Many charitable organizations share similar names or change names over time, so including the EIN in the gift language eliminates confusion when the property may be transferred well into the future.

Moreover, confirming the charitable status by identifying the EIN is also a best practice as part of the attorney’s due diligence.[37] Sometimes, a client or attorney mistakenly assumes a good cause is a registered charitable organization when that may not truly be the case and is therefore ineligible for a charitable contribution income tax deduction.

CONCLUSION

Facilitating philanthropy is just one of the many ways attorneys can uphold their obligations to render public service. Effective counsel is essential to successfully completing gifts of real property. Supporting our clients in philanthropic endeavors is one way we, as attorneys, can use our specific talents and training for the greater good.

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ABOUT THE AUTHOR

Christa Evans Rogers is an attorney and certified fundraising executive. She lives in Tulsa with her husband and fellow attorney, Timothy Rogers. Ms. Rogers was recognized as the OU College of Law outstanding graduate for the class of 2011. Her practice centers on charitable gift planning, and she serves as the vice president of client engagement for WatersEdge. She has volunteered on the boards of the OBA YLD, the Eastern Oklahoma Chapter of the Association of Fundraising Professionals, the OU College of Law Young Alumni board and as the former president of the Oklahoma Association of Charitable Gift Planners.

 

 

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ENDNOTES

[1] Bank for International Settlements, “Real Residential Property Prices for United States (QUSR628BIS),” retrieved from FRED, Federal Reserve Bank of St. Louis; https://bit.ly/3wjwIWt, January 2024.

[2] U.S. Census Bureau, “The Wealth of Households: 2021,” by Briana Sullivan, Donald Hays and Neil Bennet, June 2023, P70BR-183, “The Wealth of Households: 2021,” (census.gov).

[3] Id.

[4] Margaret Mitchell, 1900-1949. Gone with the Wind. New York: Macmillan, 1936.

[5] 26 USC §170(f)(11)(c) and the underlying Treasury Regulations.

[6] Oklahoma Rules of Professional Conduct, Rule 1.1; 31 USC §330 (1884); 31 CFR 10.1(a)(1).

[7]26 U.S.C. 1(h); IRS Publication 544.

[8] IRS Publication 526.

[9] 26 USC §170 (d)(1)(A).

[10] See Russell James, American Charitable Bequest Demographics, page 12 (“Childlessness is the single strongest demographic predictor of including a charitable bequest in one’s estate plan.”), https://bit.ly/4dxDOqS.

[11] Id.

[12] 26 USC §2055.

[13] Estate of Scott M. Hoensheid, et al. v. Commissioner (T.C. Memo 2023-34); Helvering v. Horst, 311 U.S. 112 (1940).

[14] John Heywood, (1546) The Proverbs of John Heywood: Being the "Proverbs."

[15]All or Nothing. Arthur Altman and Jack Lawrence, (1939) Columbia Records, Frank Sinatra and Harry James Orchestra.

[16] T. Souders, (2010). Whole-y Cow! Fractions are Fun!, Sleeping Bear Press.

[17] IRC 170(f)(3)(B)(ii).

[18] 26 USC §170; 26 CFR §1.1011-2 – Bargain sale to a charitable organization.

[19] 26 USC §170(f)2)(B); 26 CFR §1.170A-6. For the required terms of a CLT.

[20] 26 CFR §1.664-3; 26 USC §170(f)(2)(A); 26 CFR §1.170A-6.

[21] 26 USC §170(f)(2).

[22] PG Calc, Craig C. Wruck, (2021) The Retained Life Estate: A Most Underutilized Gift, outline5i0kcu.pdf (pgcalc.com).

[23] “Ice Ice Baby,” (1990) Robert Van Winkle (Vanilla Ice), Mario Johnson, Brian May, David Bowie, Freddie Mercury, John Deacon, Roger Taylor; To the Extreme, SBK Records.

[24] William Penn Adair Rogers (Will Rogers), (1879-1935).

[25] National Association of Estate Planners (NAEPC). Code of Ethics. Rule 9. Code of Ethics – NAEPC.

[26] Oklahoma Rules of Professional Conduct, 5 O.S. §Rule 1.6 (OSCN 2023).

[27] OBA Standards of Professionalism, §3.7a; Oklahoma Rules of Professional Conduct, 5 O.S. §Rule 2.3 (OSCN 2023).

[28] Oklahoma Rules of Professional Conduct, 5 O.S. §Rule 1.1 (OSCN 2023).

[29] “Better Together” (2005) Jack Johnson, In Between Dreams, Brushfire.

[30] Oklahoma Rules of Professional Conduct, 5 O.S. §Rule 1.7 (OSCN 2023).

[31] Oklahoma Rules of Professional Conduct, 5 O.S. §Rule 2.1 (OSCN 2023).

[32] “Step by Step,” (1990) Maurice Starr, New Kids on the Block, Columbia Records.

[33] IRC 170(f)(11)(c).

[34] 26 CFR §1.170A-17(a)(4).

[35] https://bit.ly/3yg0kEH, page 9.

[36] Tax Exempt Organization Search | Internal Revenue Service (irs.gov).

[37] Oklahoma Rules of Professional Conduct, 5 O.S. §Rule 1.3 (OSCN 2023).