Real Estate - Turning Property into Purpose

The most valuable asset that nearly every household has is the home that they live in. It has been estimated that the largest proportion of American wealth (some 30-40%) is held in real estate.

According to the Federal Housing Finance Agency, US home prices have risen in value nearly 115% from 2005 to 2025. Even when momentous instances like the Great Recession (and the resulting housing bubble burst) occur, real estate showcases its long term value as a growth engine.

Real estate as a source of charitable wealth.

However, when it comes to philanthropic efforts, gifts of real estate make up only 3% of the total gifts each year. This low percentage can likely be traced to two issues:

-Complexity: Real estate donations take time and require experts to navigate through different hurdles that require specialized knowledge.

-Charity reluctance: Many nonprofits may have concerns about accepting real estate that may have potential liabilities or require ongoing expenses (taxes, upkeep, insurance) before the property can be sold and the charity can finally put those cash proceeds to charitable use.

However, for those wealthy households who may have the benefit of owning varied properties, real estate can provide both a sizable tax savings impact for the donor and a tremendous windfall for the charity.

The Tax Saving Power of Real Estate

A donor who gifts real estate enjoys a variety of tax advantages such as:

• Capital Gains Tax Avoidance: In regular real estate transactions, a seller pays a capital gains tax on the appreciated value of the real estate. However, a real estate donation directly to a charity allows the donor to avoid any capital gains tax.

• Income Tax Deduction:  The donor can deduct the property’s full Fair Market Value (FMV) on their income taxes. However, this deduction may have restrictions, with Adjusted Gross Income (AGI) limits ( usually 30% of AGI for appreciated property) taking effect. There is also the ability to “carry forward” unused tax deductions for a period of up to 5 years.

• Estate Taxes:  By donating real estate, the taxable estate size would be reduced, thereby lowering future estate tax liability.

How to Donate Real Estate

In general, there are several ways that a real estate gift can be completed.

• Direct Ownership Transfer: The simplest method, this involves transferring the deed directly to the charity. It is the quickest way for the donor to receive their tax advantages and be relieved of any ownership expenses.

• Retained Life Estate: The donor donates the property but is able to continue to use/live in it for either a specific period of time, or for the rest of the life of the donor. Although the donor gets a tax deduction for the present value of the future gift, factors such as the property value, age of the donor, terms of use, and IRS actuarial tables all play a role in determining the deduction amount.

However, this method may prove undesirable by a charity, who may be faced with holding an asset that may take years before it can be sold for cash proceeds.

• Charitable Trust: Depending upon the type of trust (charitable remainder trust or charitable lead trust ) , the real estate can be transferred into a trust, and then the property can be sold tax-free. Depending upon the structure of the trust, the proceeds can be invested and provide either an income stream or a remainder value to the charitable cause.

An additional issue that any donor must consider is if the charity that they want to donate real estate to is willing to accept the gift. Many charities may not have the willingness, comfort, or expertise to accept a gift of real estate.

The donor must also have a qualified appraisal done and complete any necessary tax forms at the time of the gift.

What Charities Need to Know About Real Estate Gifts

Charities need to complete their own due diligence, which would include:

-Debt-Free Status: The real estate must be free of any mortgages or liens.

-Marketability: The charity needs to analyze the property on its desirability and determine how easy it is for the property to be sold.

-Maintenance/Liabilities: What is the cost of maintaining the property? Does it have issues with deferred maintenance? Are there environmental risks or liabilities?

Conclusion

A gift of real estate is a complex process. It requires a team of experts who can help a donor navigate down the path to a completed deal. For a charity who desires to receive a real estate gift, they too need to rely on professionals who can help them determine if the gift makes good financial sense. Regardless on which  side of the transaction you sit on, Generosity Nexus has nearly 15 years of experience in helping real estate transactions function well for both the donor and the charity.

Don’t hesitate to schedule an appointment to learn more about how we can help you.