Wednesday April 24, 2024

3.7.1 Personal Residence or Farm

Personal Residence or Farm

Description:   A donor may receive a charitable deduction for the transfer of a remainder interest in a personal residence or farm.

Personal Residence or Farm:   A remainder interest may be transferred in any property used by the donor as a personal residence.

Duration:   The qualified transfer of a remainder interest in a personal residence or farm is not subject to any specific limitation on duration in Sec. 170(f)(3)(B)(i).

Undivided Interests In Life Estates:   It is also possible to transfer an undivided percentage of the remainder interest.

Restrictions In The Deed:   The deed of the remainder interest to charity must not be restricted.

Mortgage on Personal Residence or Farm:   It is possible for a donor to make a gift of a remainder interest even though there is a mortgage upon the residence.

Description

A donor may receive a charitable deduction for the transfer of a remainder interest in a personal residence, farm or ranch. Sec. 170(f)(3)(B)(i). The donor deeds the personal residence or farm to a qualified exempt charity and reserves a life estate. The life estate may be a personal right for the donor to use the property, or more commonly a right to the use of the property during the donor's lifetime. The latter option would allow the donor to lease the property and receive rental payments during his or her lifetime.

Personal Residence or Farm
A remainder interest may be transferred in any property used by the donor as a personal residence. Personal residence is defined as "any property used by the taxpayer as his personal residence even though it is not used as his principal residence." This may include the taxpayer's vacation or even stock owned by a taxpayer as a tenant-stockholder in a cooperative housing corporation (as those terms are defined in Secs. 216(b)(1) and (2) and if the dwelling which the taxpayer is entitled to occupy as such stockholder is used by him as his personal residence). Reg. 1.170A-7(b)(3).

A remainder interest in a farm also qualifies for a charitable deduction. A farm is property (including the fixtures, buildings, grain bins and other permanent improvements) used by the taxpayer or tenant for the production of crops, fruits, agricultural products or the sustenance of livestock (which includes cattle, hogs, horses, mules, donkeys, sheep, goats, captive fur-bearing animals, chickens, turkeys, pigeons, and other poultry). Reg. 1.170A-7(b)(4). Nearly any property used as a residence or for agricultural purposes will qualify for a life estate gift.

Duration
The qualified transfer of a remainder interest in a personal residence or farm is not subject to any specific limitation on duration in Sec. 170(f)(3)(B)(i), and the Reg. 1.170A-7(b)(3)-(4) specifically mentions retention of an estate for life or term of years. Thus, the transfer can be for a life, lives or a term of years. Since there is no minimum 10% deduction tests, such as applies with a charitable remainder trust or charitable gift annuity, there is no specific limit on the number of lives used for the life estate. However, the life estate is most commonly created for one or two lives.

Undivided Interests In Life Estates

It is also possible to transfer an undivided percentage of the remainder interest. For example, a remainder interest in part of a farm may be transferred to charity. Rev. Rul. 78-303. Alternatively, the remainder interest may be divided and a portion of the remainder transferred to family with the balance transferred to charity. Rev. Rul. 87-37. However, if the charity receives a minority interest in the remainder, it is possible that the minority interest should be subject to a valuation discount.

The ability to transfer part of a remainder interest is beneficial if there is debt on the property. It may be possible to combine a remainder interest gift with a bargain sale. Sec. 1011(a). Alternatively, the charity may purchase a portion of the remainder interest sufficient to pay the debt, and the donor may then give the charity the balance of the remainder interest.

Example. 3.7.1A

Will Jefferson has resided in his modest home on a four acre lot for many years. He now is age 80 and his IRA distributions continue to increase. In order to create a charitable deduction to offset his increased taxable income, Will Jefferson is contemplating transferring the remainder in his home to charity. With his IRA and other assets, he has substantial liquidity and will not need the value of the home for living expenses.

Will decides to deed the remainder interest in the home to his favorite charity. Based upon his age, he receives a charitable deduction of $201,930. This deduction is an appreciated-type deduction usable to 30% of adjusted gross income. Over a period of four or five years, this charitable deduction will save $70,676 in income taxes. The deduction is based on assumed values for the residence of $50,000 and for the land of $250,000. While it is unusual for such a modest residence to be on expensive land, Will has lived on that property for many years and the adjoining city has now developed all around his property, thus increasing substantially the value of the land.

Restrictions In The Deed

The deed of the remainder interest to charity must not be restricted. When the donor passes away, the charity must receive title to the property. If the charity does not receive an unrestricted right to the property, the deduction could be denied. For example, it is not permissible for the deed to require the charity to sell the property and divide the proceeds with another co-owner. Rev. Rul. 77-305.

Mortgage on Personal Residence or Farm
It is possible for a donor to make a gift of a remainder interest even though there is a mortgage upon the residence. Unfortunately, there is very little tax guidance on the proper way to handle such a gift. Thus, each donor should proceed only after consulting with qualified counsel.

Absent specific authority, there are some basic tax principles that do provide donors with guidance. First, the charitable deduction calculation should only take the equity portion of the residence into account. It stands to reason that a donor should not enjoy a charitable deduction based upon the debt portion of the property. Indeed, if the donor dies the day after the gift, charity would only receive the value of the property net of the debt. Thus, at the time of the gift, the equity in the property seems an appropriate starting point for measuring the benefit to charity.

Second, with each additional mortgage payment by the donor, it is arguable that a new charitable deduction is allowable equal to the amount of principal reduction. See PLR 9329017. While this is a favorable position, it also involves a good deal of record keeping. In particular, the donor should retain appropriate documentation with respect to the mortgage payments and ongoing principal balance. The donor also needs to calculate a new charitable deduction each year for the remainder value of his or her gift.

Finally, the transfer of property subject to a mortgage may be deemed a bargain sale. Under the bargain sale rules, a donor is treated as having sold the property for the amount of indebtedness. There are two ways to minimize this potential problem. First, a donor may draft a "hold harmless" agreement. Pursuant to this agreement, a donor remains fully liable for the debt and does not hold charity responsible for any amount of the debt. This agreement allows a donor to argue that there is no relief of indebtedness. See Sec. 61. Second, a donor may apply his or her home exclusion to the deemed sale. With a $250,000 or $500,000 home exclusion, many donors can completely avoid any capital gain triggered as a result of the transfer.

Case Studies on Personal Residence or Farm

Death and Taxes - The Madison Era of Giving, Part 4 of 7:   George Madison, Jr., 78, owns several homes scattered across the world. During his younger years, he thoroughly enjoyed traveling and spending time at each home. However, his health has severely restricted his mobility. As a result, most of his vacation homes sit dormant and unused throughout the year. Furthermore, the cost to maintain all of the homes is quite staggering even to someone in George's financial position. Consequently, George - now an experienced "planned giver" - assumes there must be a way he can use his housing excess to benefit both charity and himself. After speaking with his attorney, Matthew Cohen, George decided to gift a remainder interest in his $4 million Hampton summer home. Mr. Cohen explained that this gift would produce a charitable income tax deduction of more than $2 million. While George would still be responsible for the maintenance, insurance and taxes on the home, the tax savings would greatly offset those costs. George likes the plan even more because it does not divest him of his right to use the home. In fact, George retains the right to use the Hampton home for the rest of his life. Not until his death would the home pass to the named charity. The only reservation George has is about the excessive income tax deduction. It is not that he does not like the size of the deduction, but given his current yearly income he is unable to use the $2 million deduction even if he carries it forward five years.

The Philandering Philanthropist, Part 2 of 4 - $2.5 Million Ranch to Charity:   John Doe, 77, is a self-made man. Deserted by his parents at a young age, John grew up in a boys' home and on the streets. At the age of 17, he moved to Texas to chase oil and women. With his street smarts and gritty determination, John made millions in the oil business as an arrogant and risk-taking maverick. His fortune with women, however, was not nearly as successful. In fact, John was married - and divorced - four times. To this day, John still claims it was "all their fault" and remains bitter toward his ex-wives. Yet, he continues to date and currently has several "girlfriends." Also, John has six children, but unfortunately, does not have any ongoing relationship with them. He contends that his children are spoiled and ungrateful because he gave them too much while they were growing up. More likely, John's poor relationships stem from the lack of any family structure in his youth and the minimal amount of support given to him as a child.

Marketing Ideas During Soft Markets and Dropping Interest Rates, Part 4 - The Great Home Give Away:   Harold Henry, 77, is a very generous American. He is the stereotypical major donor that charities love to find. Coming from a wealthy and philanthropic background, Harold has given approximately $15 million to national and local charities over his lifetime.

A QPRT with a Charitable Twist:   David Adams, age 65, owns five acres of woodland property located in the nearby mountains. On this property he has built a vacation home that he and his spouse use a number of times throughout the year. Also, for certain periods during the year, he permits his two sons and their families to use the home rent-free. It has become a favorite vacation spot for them since the property is right on a lake, has its own boat dock and is an excellent "fishing hole." The vacation home also includes a separate apartment that he rents to various friends.

Living on the Edge, Part 2:   Rhea Jones, 75, lives in a beautiful coastal town in northern California. Rhea's home occupies three magnificent acres of bluff property overlooking the crashing waves of the Pacific. Since her home sits just steps away from the dramatic cliffs, Rhea frequently jokes to her friends about her "living on the edge" lifestyle.

John, Rhea's husband of 50 years, built the custom home 10 years ago. It was truly the realization of their lifelong dream. Unfortunately, John passed away unexpectedly five years ago. Now, Rhea lives alone in the large home. Nevertheless, she is looking forward to spending her remaining days in this lovely home. Not surprisingly, she frequently plays host to her children, grandchildren and friends.

Rhea is an active philanthropist. In fact, she spends three days a week volunteering with local charities. While very wealthy and philanthropic, Rhea makes only modest yearly gifts. However, she intends to make a substantial bequest upon her death. Specifically, Rhea plans on distributing her entire estate to her children and grandchildren, except for her cliffside home. Rhea's estate plan provides that the home passes to John and Rhea’s favorite charity upon her death. The home is worth $13 million.

At a recent estate planning presentation, Rhea discovered the benefits of a gift of a remainder interest in a personal residence. In particular, she liked the potential significant tax savings and avoiding the probate process. Also, because the gift is irrevocable, the local charity would recognize and honor Rhea for her generous gift at the annual fundraising gala. Of course, Rhea retains the right to live in her home for the rest of her life, which is an absolute requirement for any potential gift arrangement.

Rhea is very excited about this gift arrangement, but she has many questions for her attorney. Before she commits to the gift plan, she wants to address several questions. In particular, Rhea learns that now is an excellent time for gifts of remainder interests in a home. Why is this so?
Living on the Edge, Part 3:   Rhea Jones, 75, lives in a beautiful coastal town in northern California. Rhea's home occupies three magnificent acres of bluff property overlooking the crashing waves of the Pacific. Since her home sits just steps away from the dramatic cliffs, Rhea frequently jokes to her friends about her "living on the edge" lifestyle.

John, Rhea's husband of 50 years, built the custom home 10 years ago. It was truly the realization of their lifelong dream. Unfortunately, John passed away unexpectedly five years ago. Now, Rhea lives alone in the large home. Nevertheless, she is looking forward to spending her remaining days in this lovely home. Not surprisingly, she frequently plays host to her children, grandchildren and friends.

Rhea is an active philanthropist. In fact, she spends three days a week volunteering with local charities. While very wealthy and philanthropic, Rhea makes only modest yearly gifts. However, she intends to make a substantial bequest upon her death. Specifically, Rhea plans on distributing her entire estate to her children and grandchildren, except for her cliffside home. Rhea's estate plan provides that the home passes to John and Rhea's favorite charity upon her death. The home is worth $13 million.

At a recent estate planning presentation, Rhea discovered the benefits of a gift of a remainder interest in a personal residence. In particular, she liked the potential significant tax savings and avoiding the estate administration process. Also, because the gift is irrevocable, the local charity would recognize and honor Rhea for her generous gift at the annual fundraising gala. Of course, Rhea would retain the right to live in her home for the rest of her life, which is an absolute requirement for any potential gift arrangement.

Rhea is very excited about this gift arrangement, but she has many questions for her attorney. Before she commits to the gift plan, she wants to address several questions. Her primary question is how is the charitable deduction set for a gift of a remainder interest in a personal residence?
Living on the Edge, Part 4:   Rhea Jones, 75, lives in a beautiful coastal town in northern California. Rhea's home occupies three magnificent acres of bluff property overlooking the crashing waves of the Pacific. Since her home sits just steps away from the dramatic cliffs, Rhea frequently jokes to her friends about her "living on the edge" lifestyle.

John, Rhea's husband of 50 years, built the custom home 10 years ago. It was truly the realization of their lifelong dream. Unfortunately, John passed away unexpectedly five years ago. Now, Rhea lives alone in the large home. Nevertheless, she is looking forward to spending her remaining days in this lovely home. Not surprisingly, she frequently plays host to her children, grandchildren and friends.

Rhea is an active philanthropist. In fact, she spends three days a week volunteering with local charities. While very wealthy and philanthropic, Rhea makes only modest yearly gifts. However, she intends to make a substantial bequest upon her death. Specifically, Rhea plans on distributing her entire estate to her children and grandchildren, except for her cliffside home. Rhea's estate plan provides that the home passes to John and Rhea's favorite charity upon her death. The home is worth $13 million.

At a recent estate planning presentation, Rhea discovered the benefits of a gift of a remainder interest in a personal residence. In particular, she liked the potential significant tax savings and avoiding the estate administration process. Also, because the gift is irrevocable, the local charity would recognize and honor Rhea for her generous gift at its annual fundraising gala. Of course, Rhea would retain the right to live in her home for the rest of her life, which is an absolute requirement for any potential gift arrangement.

Rhea is very excited about this gift arrangement, but she has many questions for her attorney. Before she commits to the gift plan, she wants to address several questions. Her primary question is how is the charitable deduction set for a gift of a remainder interest in a personal residence?
Living on the Edge, Part 5:   Rhea Jones, 75, lives in a beautiful coastal town in northern California. Rhea's home occupies three magnificent acres of bluff property that overlooks the crashing waves of the Pacific. Since her home sits just steps away from the dramatic cliffs, Rhea frequently jokes to her friends about her "living on the edge" lifestyle.

John, Rhea's husband of 50 years, built the custom home 10 years ago. It was truly the realization of their lifelong dream. Unfortunately, John passed away unexpectedly five years ago. Now, Rhea lives alone in the large home. Nevertheless, Rhea is looking forward to spending her remaining days in this lovely home. Not surprisingly, she frequently plays host to her children, grandchildren and friends.

Rhea is an active philanthropist. In fact, she spends three days a week volunteering with local charities. While very wealthy and philanthropic, Rhea makes only modest yearly gifts. However, she intends to make a substantial bequest upon her death. Specifically, Rhea plans on distributing her entire estate to her children and grandchildren, except for her cliffside home. Rhea's estate plan provides that the home passes to John and Rhea's favorite charity upon her death. The home is worth $13 million.

At a recent estate planning presentation, Rhea discovered the benefits of a gift of a remainder interest in a personal residence. In particular, she liked the potential significant tax savings avoiding the estate administration process. Also, because the gift is irrevocable, the local charity would recognize and honor Rhea for her generous gift at the annual fundraising gala. Of course, Rhea would retain the right to live in her home for the rest of her life, which is an absolute requirement for any potential gift arrangement.

Rhea is very excited about this gift arrangement, but she has many questions for her attorney. Before she commits to the gift plan, she wants to address several questions. Her primary question is how is the charitable deduction set for a gift of a remainder interest in a personal residence?
E-I-E-I-O Life Estate:   Marilyn Frazier, a widow age 77, owns a 40-acre parcel of property adjacent to the local university which she attended over fifty years ago. She was unable to graduate back then and decided a few years ago to fulfill her lifelong dream of obtaining a college degree. The university was very receptive to her desire to graduate and went out of their way to plan her curriculum allowing her to complete her degree in two years. Her story was well publicized in the local papers and she was so pleased with the university that she has decided she would like to make a substantial gift to the university when she is gone.

A Life Estate Split Transfer to Family and Charity:   Roberta Wilcox is 80 years old and has lived in her personal residence over fifty years. She has two children, six grandchildren and ten great grandchildren. Her husband passed away fifteen years ago after a long and protracted illness. Roberta has a very modest estate of $350,000 and her primary asset is her residence with a fair market value of $100,000. Along with some personal property, the balance of her estate assets consists of stocks and bonds. Just this past week, taking the advice of her stockbroker, she sold some of her America On Line stock and incurred a very substantial gain. She is now very concerned that she may have to pay a sizable capital gains tax.

Rodeo Rider Life Estate Produces Current Gift:   Mac Swenson loved the great outdoors. He grew up in the Big Sky country of Montana. As soon as he could walk, Mac was on a pony. By his teen years, Mac was riding horses every day. On weekends, he watched with admiration as the older cowboys practiced riding bucking broncos at the local rodeo grounds.

Rodeo Rider Life Estate Rollover:   Mac Swenson loved the great outdoors. He grew up in the Big Sky country of Montana. As soon as he could walk, Mac was on a pony.

Related Topics on Personal Residence or Farm

3.7.2  Maintenance, Insurance and Taxes (MIT) Agreement:    When a life estate is created, the donor retains the life use. Under the common law of most states, the life tenant is obligated to maintain the property. However, a written agreement that clarifies the roles and responsibilities of both the donor and the charity is desirable.

3.7.3  Life Estate Rollover Options:    Under Sec. 170(f)(2) of the Internal Revenue Code, a person may give a remainder interest in a personal residence, farm or ranch to a charity and reserve the right to live there for one or two lives. But what if circumstances change and the donor no longer desires to live in the home? There are several potential flexibility options for this donor.

3.7.4  Income, Gift and Estate Tax:    An income tax deduction is permitted for the present value of the remainder interest. It is calculated using the Applicable Federal Rate (AFR) under Sec. 7520 and factors from IRS Pub. 1457. The remainder must be reduced by straight-line depreciation for the income tax deduction. Sec. 170(f)(4).

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