Thursday April 18, 2024

Rev. Rul. 76-473

GiftLaw Note: A charitable remainder interest in a personal residence or farm qualifies for income, gift and estate tax deductions. Sec. 170(f)(4) requires that depreciation be taken into account for purposes of determining an income tax deduction for the value of the remainder interest in the home or farm. However, for gift tax (and presumably estate tax) purposes, the depreciation calculation is not required.

In this ruling, a transfer was made of a remainder interest to a qualified exempt charity, with an intervening term of 20 years' income interest to a third party. Depreciation was required for determination of the income tax deduction for the value of the remainder interest, but depreciation was not used for determination of the gift value of the term of years' income interest for the third party recipient.

Rev. Rul. 76-473, 1976-2 C.B. 306

Section 2522 -- Charitable Gifts

Service Headnote

Charitable remainder interest in personal residence; valuation. A charitable remainder interest in a personal residence donated to a church in 1976, subject to a 20-year term for a noncharitable tenant, is valued for gift tax purposes without taking into consideration the elements of depreciation for the period during which the property will be in the noncharitable tenant's possession. The value of the charitable remainder interest is higher for gift tax purposes than for income tax purposes.

Full Text
Rev. Rul. 76-473

Advice has been requested whether, for Federal gift tax purposes, the method of evaluating a charitable remainder interest in real property should reflect an adjustment for future depreciation for the period during which the property will be in the possession of a noncharitable tenant for a term certain.

In 1976, D donated to X Church a remainder interest in D's personal residence, consisting of a house and land, subject to a 20 year term for A or A's estate should A die within 20 years. At the time of the donation, the house was worth $60,000 and had an expected useful life of 45 years, at the end of which time it is expected to be worth $10,000. The land was worth $8,000 at the time of the donation.

In computing a donor's taxable gifts for the calendar quarter, section 2522(a) of the Internal Revenue Code of 1954 authorizes a deduction for the amount of all gifts made during the quarter to or for the use of any corporation organized and operated exclusively for religious, charitable, etc., purposes.

Sections 201(a) and (d) of the Tax Reform Act of 1969 (Pub. L. 91-172, 1969-3 C.B. 10) added section 170(f)(4) and amended sections 2055(e) and 2522(c) of the Code to allow income, estate and gift tax charitable contribution deductions for nontrust gifts of remainder interests in personal residences or farms.

Section 170(f)(4) of the Code, which relates to the income tax deduction, provides that depreciation and depletion will be taken into account in determining the value of remainder interests in real property for purposes of section 170 if the property was contributed after July 31, 1969. The Code specifically provides that depreciation shall be computed by the straight line method and that the value of a remainder interest shall be discounted at the rate of six percent, except that the Secretary of the Treasury or the Secretary's delegate may prescribe a different rate. There is no comparable provision in section 2522(c) (or section 2055(e)) of the Code, as amended by the Tax Reform Act of 1969.

Accordingly, for Federal gift tax purposes a charitable remainder interest in a personal residence is valued without taking into consideration the elements of depreciation. Thus, in the instant case, the value of the charitable remainder interest for gift tax purposes is $21,202.74 (that is: $68,000 times .311805 (factor from Table B of section 25.2512-9(f) of the Gift Tax Regulations)).

For income tax purposes, the value of the charitable remainder interest is $14,273.74 (that is: $68,000 minus ($60,000 minus $10,000 times 20/45) times .311805). See the example in section 1.170A-12(c) of the Income Tax Regulations.