Friday April 19, 2024
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4.7.1 Value of Real Estate Gifts
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Value of Real Estate Gifts
Transfer of Real Estate: Under state law, a gift of real estate is generally accomplished by transferring a properly executed and notarized deed to charity.
Long-term Capital Asset: As a general rule, a donor will receive a charitable deduction equal to the fair market value of contributed real estate.
Depreciation: In some cases, a donor may own real estate that he or she has depreciated, e.g., rental property.
Qualified Appraisal: If the charitable deduction for a gift of real estate exceeds $5,000, a qualified appraisal is required.
Conservation Easement Deductions: Conservation easement deductions are permitted under Sec. 170(f)(3)(B) if several tests are met.
Conservation Deductions For Farmers and Ranchers: For qualified farmers and ranchers, the deduction is increased to 100% of the excess of the taxpayer's contribution base over the amount of all other allowable charitable contributions.
Reforming Charitable Easement Deductions to Consider Previous Rehabilitation Credits: For qualified rehabilitation expenditures for certified historic structures, there is a rehabilitation credit.
No Related Use: Unlike gifts of tangible personal property, there is no requirement that the charity actually use the real estate to further its exempt purposes.
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Permanent Charitable Tax Extenders
In December of 2015, both the Senate and House passed the Protecting Americans From Tax Hikes Act of 2015 (H.R. 2029). The bill makes permanent four charitable tax extenders.
The four permanent charitable provisions include the following:
1. Conservation Gift Limits – Gifts of property for conservation purposes benefit from increased deduction limits. The normal 30% limit for appreciated property gifts is increased to 50% and the carry-forward limit is extended from five years to 15 years.
2. Food Inventory Gifts – An enhanced deduction for contributions of "apparently wholesome" food will be available for all donors. The deduction is the lesser of twice the basis or basis plus one-half of the appreciation.
3. IRA Charitable Rollover – Each IRA owner may make a transfer of up to $100,000 per year to a qualified charity. The IRA charitable rollovers are tax-free and not included in adjusted gross income.
4. S Corporation Appreciated Gifts – A Subchapter S corporation may give appreciated stock or land to charity. Only the basis of the S corporation in the donated asset will be used to reduce the shareholder basis, even though the full fair market value deduction is claimed by the shareholder.
Transfer of Real Estate
Under state law, a gift of real estate is generally accomplished by transferring a properly executed and notarized deed to charity. While it is important that charity record the deed as soon as possible, the gift date is usually the date the deed is delivered to charity. If the delivery and recording of the deed can occur in the same tax year, there should be little dispute regarding the timing of the charitable deduction.
If the charity plans to sell the property after it is donated, it is extremely important that the donor contribute the property without making any sales commitment to a third party, since this could create a prearranged sale. The key issue is whether the charity is legally bound to sell the property to another party by reason of the donor's commitment. If the charity has complete control over picking the buyer and the price, the donor can safely proceed. If the charity cannot pick the buyer and the price, the donor can still give the property, but he or she will lose the ability to bypass capital gain. In essence, the donor will be treated as having sold the property and then having donated cash to charity.
Whether or not a particular situation involves a prearranged sale is highly dependent upon the facts and circumstances of the situation. For example, a sales commitment may exist if there is a signed contract of sale, transfer of earnest money or enforceable oral contract. Examples of permissible conduct - where there is no prearranged sale - may include a listing of the property, letter of intent, right of first refusal and oral negotiations.
Lastly, since the gift of real estate will exceed $5,000 in nearly every case, the donor should request a gift acknowledgment from the charity at the time of the contribution, obtain a qualified appraisal, and file Form 8283. For further information on gift acknowledgments, appraisals and Form 8283, see GiftLaw Pro 1.6.1 and 1.5.2.
Long-term Capital Asset
As a general rule, a donor will receive a charitable deduction equal to the fair market value of contributed real estate. However, the value of a donor's charitable deduction depends on two factors.
First, it is important that the real estate qualify as a capital asset. Real estate is generally not a capital asset if it is inventory or it is property sold in the ordinary course of a donor's business. Sec. 1221. For example, donors who are real estate developers would fall into this category for sales of lots held as inventory. For most donors, investment or personally used real estate will qualify as a capital asset.
Second, it is important that donors hold the real estate for more than one year and a day so that it will qualify as a long-term capital gain asset. The benefits of this classification are twofold. If the donor sells the real estate, the donor will be subject to the capital gains tax rate. Alternatively, if the donor contributes the real estate to charity, the donor will be entitled to a fair market value charitable deduction. In the case of gifts of appreciated property, the 30% AGI limitation will generally apply. See Sec. 170(b)(1)(C).
In contrast, gifts of short-term capital gain assets are deductible at cost basis. Sec. 170(e)(1)(B)(ii). Therefore, if a donor has held a property for less than a year and a day, the donor will receive a deduction based on the cost basis, rather than the fair market value of the property.
Example 4.7.1A
Lisa Landowner purchased some investment property five years ago for $100,000. Since that time, the property has grown in value to $200,000. Because Lisa does not hold the property as inventory or as property sold in the ordinary course of her business, it will qualify as a capital asset. Furthermore, Lisa has held the property for more than a year, so it will qualify as a long-term capital gain asset. Lisa is contemplating either selling the property or giving it to her favorite charity.
If the property is sold, Lisa will have $100,000 of long-term capital gain income ($200,000 - $100,000). The federal capital gains tax rate is 15% for Lisa. Therefore, she would owe $15,000 of capital gains tax. If Lisa contributes the property to charity, she will receive a $200,000 charitable income tax deduction. Moreover, she will not have any capital gains tax with respect to the property. This charitable deduction is subject to the 30% AGI limitation, since it relates to a charitable gift of appreciated property.
Depreciation
In some cases, a donor may own real estate that he or she has depreciated, e.g., rental property. As a result, there may be depreciation recapture issues. If a donor has taken accelerated depreciation, depreciation recapture requires a donor to realize ordinary income upon sale of the depreciated property in an amount equal to the excess of accelerated depreciation over straight-line depreciation. See Sec. 1250. In the event deprecation recapture applies to a donor, any gift of the depreciated property will be subject to the income tax reduction rules. Basically, the initial fair market value charitable deduction will be reduced by the ordinary income component of the real estate. See Sec. 170(e)(1)(A).
Example 4.7.1B
Lisa Landowner purchased some investment property 10 years ago for $100,000. It is now valued at $200,000. During the past 10 years, Lisa has taken $50,000 of accelerated depreciation on the property, so her adjusted cost basis is $50,000. After speaking with her CPA, she discovers she would have $20,000 of depreciation recapture or ordinary income to report if she sold the property. The $20,000 figure represents the excess of accelerated depreciation ($50,000) over straight-line depreciation ($30,000).
Under the normal charitable deduction rules, Lisa would receive a $200,000 charitable deduction for a gift of the property. However, since there is $20,000 of depreciation recapture, Lisa's charitable deduction is $180,000 ($200,000 - $20,000).
If Lisa instead sells the property for $200,000, it will be subject to several tax rates. The $100,000 difference between the original cost basis ($100,000) and the sales price ($200,000) is subject to the long term capital gain tax rate. The $20,000 excess of accelerated depreciation ($50,000) over straight-line depreciation ($30,000) is subject to ordinary income tax rates. Finally, the capital gain attributable to straight-line depreciation is subject to a capital gain tax rate of 25%. In this case, the original basis is $100,000. Using only straight-line depreciation, the adjusted cost basis is $70,000. Thus, $30,000 is subject to the 25% tax rate ($100,000 - $70,000).
In the end, Lisa has $150,000 of income to report ($200,000 - $50,000). Of the $150,000, $100,000 is long term capital gain, $30,000 is 25% depreciation gain, and $20,000 is ordinary gain (or less depending on Lisa's income tax bracket).
Qualified Appraisal
If the charitable deduction for a gift of real estate exceeds $5,000, a qualified appraisal is required. Form 8283 must also be filed with the donor's income tax return. For a full discussion on Form 8283 and qualified appraisals, see GiftLaw Pro 1.5.2.
Conservation Easement Deductions
Conservation easement deductions are permitted under Sec. 170(f)(3)(B) if several tests are met. First, the conservation easement must be a real property interest, usually a restriction granted in perpetuity concerning the use of the property. Second, the recipient must be a "qualified organization." Third, the gift must be made "exclusively for conservation purposes." Fourth, for an historic area home easement deduction, the entire exterior must be preserved and any changes in the front, sides or rear "inconsistent with the historical character" are prohibited.
Normally, appreciated property deductions are limited to 30% of AGI, with a carry forward deduction usable for up to five years. However, Sec. 170(b)(1)(E) permits deductions for qualified conservation easements to qualify for the more generous 50% of AGI contribution level, with a potential carry-forward of up to 15 years.
The deduction must be supported by a qualified appraisal. An independent professional appraiser with appropriate credentials and experience in conservation easements must value the gift. Sec. 170(f)(11)(E).
If the gift is a home in an historic district, all four sides of the building must be preserved. Sec. 170(h)(4)(B)(i). In that case, the appraisal must include photos of the four sides of the home, a $500 fee and an agreement with a qualified conservation charity. The appraisal must be submitted with the tax return. The agreement states under oath that the conservation charity is qualified to receive the easement and has the resources and commitment to enforce the agreement. Sec. 170(h)(4)(B)(ii).
Most gifts of appreciated property qualify for a charitable deduction with a 30% of adjusted gross income limit and a five-year carry-forward. However, a qualified conservation contribution to an organization described in Sec. 170(b)(1)(A) is deductible to the extent of the excess of 50% of the contribution base over the amount of all other allowable charitable contributions. Therefore, the other charitable contributions are first deducted under Sec. 170 provisions. Then, to the extent that other contributions do not exceed 50% of adjusted gross income, qualified public charity conservation gifts are deducted. If there is a carry forward for qualified conservation gifts, it may be used over the next 15 years. Sec. 170(b)(1)(E).
Example 4.7.1C Conservation Easement 50% Deduction
Joe Landowner has a contribution base of $100,000 and makes a qualified conservation contribution of $80,000 this year. He also gives cash of $60,000 to public charities. Joe may deduct 50% or $50,000 of the cash gift, and will carry forward $10,000 of the cash gift for up to five years. The $80,000 conservation gift does not qualify for a current deduction, but may be carried forward for up to 15 years.
Conservation Deductions For Farmers and Ranchers
For qualified farmers and ranchers, the deduction is increased to 100% of the excess of the taxpayer's contribution base over the amount of all other allowable charitable contributions. The excess may also be carried forward for 15 years. Sec. 170(b)(1)(E)(iv)(I). The qualified farmer or rancher must receive more than 50% of his or her gross income (as defined in Sec. 2032A(e)(5)) from ranching or farming activity and the land must remain available for agricultural or livestock production. Sec. 170(b)(1)(E)(iv)(II).
Example 4.7.1D Ranch 100% Deduction
Jane Rancher has a contribution base of $100,000 and makes a qualified ranch conservation easement gift of $80,000 this year. She also gives cash of $60,000 to public charities. Jane may deduct 50% or $50,000 of the cash gift and will carry forward $10,000 of the cash gift for up to five years. The $80,000 conservation gift qualifies for a $50,000 gift this year (the difference between the 50% deducted and 100% of the contribution base) and the $30,000 balance of the conservation gift may be carried forward for up to 15 years.
In the case of a corporation (other than a publicly traded corporation) that is a qualified farmer or rancher, for the taxable year in which the contribution is made, any qualified conservation contribution is allowable up to 100% of the excess of the corporation's taxable income (as computed under Sec. 170(b)(2)) over the amount of all other allowable charitable contributions. Any excess may be carried forward for up to 15 years as a contribution subject to the 100% limitation.
Reforming Charitable Easement Deductions to Consider Previous Rehabilitation Credits
For qualified rehabilitation expenditures for certified historic structures, there is a rehabilitation credit. The rehabilitation credit could be as much as 20% of qualified rehabilitation expenditures for a certified historic structure. If a charitable easement in an historic structure is created, then the deduction calculation must consider the rehabilitation credits taken during the preceding five years. The amount of the deduction is reduced by an amount that bears the same ratio to the gift fair market value as the sum of the rehabilitation credits under Sec. 47 for the preceding five taxable years bears to the fair market value on the gift date. For example, a $1 million building with credits during the previous five years of $100,000 will be valued at $900,000 for purposes of determining the conservation contribution. Sec. 170(f)(14).
No Related Use
Unlike gifts of tangible personal property, there is no requirement that the charity actually use the real estate to further its exempt purposes. See Sec. 170(e). As a result, a donor will enjoy the favorable fair market value charitable deduction regardless of a charity's planned use.
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Case Studies on Value of Real Estate Gifts
Preserving the Razorback Sucker, Bonytail and the Inheritance:
Marty Campbell, 71, owned more than 2,000 acres along the upper Sampson River. As a nature advocate, Marty strongly opposed the non-natural developments along the Sampson River. In particular, dam installations and the introduction of non-native fish changed the river environment and put many fish at risk. For example, the razorback sucker, humpback chub and bonytail all once thrived in the Sampson River system but now face potential extinction. Marty wanted to do something positive to help the situation.
Give Peace a Chance:
Several years ago, Martha and Frank built a very unique home on 45 acres of beautiful rolling hills and woods. Frank passed away three years ago and now Martha solely owns the 45-acre parcel and home.
Exit Strategies for Real Estate Investors, Part 8:
Karl Hendricks was a man with the golden touch. Throughout his life, it seemed every investment idea that he touched turned to gold. Karl's passion was real estate, and he was very successful in his investments.
Exit Strategies for Real Estate Investors, Part 9:
Karl Hendricks was a man with the golden touch. Throughout his life, it seemed every investment idea that he touched turned to gold. Karl's passion was real estate, and he was very successful in his investments.
Exit Strategies for Real Estate Investors, Part 10:
Karl Hendricks was a man with the golden touch. Throughout his life, it seemed every investment idea that he touched turned to gold. Karl's passion was real estate, and he was very successful in his investments.
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Private Letter Rulings
PLR
200002020 Gift of Farm Conservation Easement Qualifies for Charitable Deduction:
The taxpayer owned both a 110-parcel acre of property that is to be used for the qualified conservation easement and a five-acre parcel that will eventually be sold for residential development. The property consists of woods, a stream and farmland and is in a rapidly developing area of the county. A portion of the property is currently classified for agricultural use.
PLR
200014013 Estate-Tax-Saving Conservation Easement:
Decedent owned company A and had during life transferred to charity several conservation easements on ranchland owned by company A. The conservation easements were transferred to a qualified organization in accordance with IRC Sec.170(h)(3).
PLR
200116007 Transfer of Restricted Land to Private Foundation Still Qualifies Estate for Deduction:
Taxpayer owned a land estate and other substantial assets. Taxpayer desired that at his death the land estate be used as a public museum and garden operating exclusively for charitable and educational purposes. He thus during his lifetime created a private foundation (PF) whose exempt purpose was to preserve and maintain the land for future public use.
PLR
200120002 Transfer of Land to Private Foundation Qualifies Estate for Charitable Deduction:
Taxpayer owned a land estate and other substantial assets. Taxpayer desired that at his death the land estate be used as a public museum and garden operating exclusively for charitable and educational purposes. He thus during his lifetime created a private foundation (PF) whose exempt purpose was to preserve and maintain the land for future public use.
PLR
200143011 Charitable Deductions Approved for Estate and Beneficiaries:
Husband and wife created a 20-year term revocable trust and funded it with land. On husband's death, the trust residue was divided into a marital trust and a family trust.
PLR
200403044 Donated Easement is a Deductible "Qualified Conservation Contribution":
Lincoln Limited Liability Company (LLLC) owns land that includes various habitats for several endangered, threatened and rare animal and plant species. LLLC proposes to grant a perpetual easement to the Waterfowl and Wetland Foundation (WWF), a public charity.
PLR
200403049 Partial Use of Home Exclusion Allowed if Unforeseen Circumstances:
Harry Husband and Wendy Wife purchased Principal Residence. One month after the purchase of Residence, Randy Relative was ordered by the court to live in Residence under house arrest.
PLR
200738013 Appraisal's for Façade Easement Gifts:
In ILM 200738013, issued Aug. 9, 2007, the IRS set forth guidelines for charitable deduction appraisals of gifts of façade easements.
PLR
200741016 IRA Loan To Charity Permitted:
IRA owner desires to make a 20 year term loan with annual 5% interest payments to church B. The self-directed IRA custodian is willing to transfer funds to church B in exchange for both the 20 year/5% note and a collateral assignment on an insurance policy.
PLR
200836014 Grant of Conservation Easement is Tax Deductible:
Business made a grant of a conservation easement on real property consisting of forest, marsh and saltwater habitats for endangered species to a charitable organization in perpetuity. The charity is organized as a public charity within the meaning of Sec. 170(b)(1)(A)(vi) created to preserve natural and rural land along the coast of State X.
PLR
200840018 Conservation Easement Exception for Sec. 2032A Farm Denied:
Father passed away on Date 1 and left his farm to Taxpayer. The executor for Father's estate filed Form 706. On schedule A-1, the executor elected to value the real property based on its use as a farm rather than its assumed highest and best use.
PLR
201302043 Sale of Conservation Easement Will Not Jeopardize Club's Exemption:
Club is classified as an exempt organization under Sec. 501(c)(7) of the Code. Club has operated continuously as a social club for over a decade. Club's purpose is to own and operate a private club for golf and other leisure activities for the recreation of its members.
PLR
201318003 IRS Rules on Donation of Depreciated Property:
Taxpayer owns certain improved real property located at Taxpayer's B plant in City 1, State 1 ("the B property"). The B property contains certain depreciable real property that is Sec. 1250 property ("the Property").
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Related Topics on Value of Real Estate Gifts
1.1.4
Gift Reduction Rules:
Gifts of cash are deductible at face value. Most gifts of appreciated property are deductible at fair market value. Value is usually defined as the price that a willing buyer would pay to a willing seller. Reg. 1.170A-1(c)(1). However, some types of property gifts are not deductible at fair market value. For specific policy reasons, these gifts will be reduced in value for deduction purposes.
1.5.1
Fair Market Value:
Property is bought and sold every day between willing buyers and willing sellers. The determination of value for any charitable gift is simple. It is merely the value that a willing buyer would pay a willing seller. However, the specific rules for determining value can vary considerably. Cash is, of course, worth its face value and public securities can be valued by their worth on an exchange, but other assets are more difficult to value. Thus, there are specific rules for valuing stocks, real estate, mutual funds, life insurance, art and other types of property. Reg. 20.2031-1(b).
1.5.2
Form 8283 and Appraiser Qualifications:
Gifts of $250 or more to a charity require a receipt. The receipt issued by the charity must state that no goods or services have been transferred in exchange for the gift. Reg. 1.170A-13. If the donor receives a "quid pro quo" ( i.e., something in return) from the charity, the deduction value is reduced by the value of the "quid pro quo." For "quid pro quo" gifts over $75, the charity must make a good faith estimate of the value of the goods or services transferred to the donor and disclose the estimate. Reg. 1.170A-13(f).
Langer:
In Estate of F. Wallace Langer et. al. v. Commissioner; T.C. Memo. 2006-232; No. 11116-04 (30 Oct. 2006), the estate and IRA appraisers contested valuations.
Kaufman:
In Gordon Kaufman et ux. v. Commissioner; 136 T.C. No. 13; No. 15997-09 (3 Apr 2011), the Tax Court affirmed a partial summary judgment that denied a charitable deduction for a façade easement.
East LLC:
In 1982 East LLC et al. v. Commissioner; T.C. Memo. 2011-84; No. 30052-08 (12 Apr 2011), the Tax Court determined that a limited liability company would not receive a charitable deduction for the grant of a facade easement.
Mitchell:
In Estate of James J. Mitchell et al. v. Commissioner; T.C. Memo. 2011-94; No. 17351-09 (28 Apr 2011), the Tax Court determined that the estate valuations were correct.
Wall:
In Frederick M. Wall v. Commissioner; T.C. Memo. 2012-169; No. 17209-09 (18 Jun 2012), the Tax Court determined that a façade easement on a mortgaged home would not qualify for a charitable deduction.
Scheidelman:
In Huda T. Scheidelman v. Commissioner; No. 10-358 (15 Jun 2012), the 2nd Circuit reversed a Tax Court decision denying a charitable deduction for a façade easement with an appraisal based upon a percentage of value method.
Kaufman:
In Gordon Kaufman et ux. v. Commissioner; Nos. 11-2017 (18 Jul 2012), the First Circuit determined that a façade easement deduction was not explicitly precluded by the existence of a mortgage, but they remanded the case to the Tax Court and noted that the local zoning requirements of the historic district may eliminate most of the charitable deduction.
Rothman:
In Steven Rothman et ux v. Commissioner; T.C. Memo. 2012-163; No. 17547-10 (Jun 2012) the Tax Court denied a $290,000 façade easement charitable deduction because the appraiser had used a percentage method.
Trout:
In Trout Ranch LLC el al. v. Commissioner; No. 11-9006 (15 Aug 2012), the 10th Circuit affirmed a Tax Court valuation for a conservation easement.
RP Golf LLC:
In RP Golf, LLC et al. v. Commissioner; T.C. Memo. 2012-282 (2 Oct 2012), the Tax Court ruled on motions for summary judgment with respect to a conservation easement.
Irby:
In Charles R. Irby et ux. et al. v. Commissioner; 139 T.C. No. 14; Nos. 7559-10, 7561-10, 7562-10, (24 Oct 2012), the Tax Court approved a conservation easement deduction as part of a bargain sale.
White House Hotel Limited Partnership:
In White House Hotel Limited Partnerships v. Commissioner; 139 T.C. Memo. 13; No. 12104-03 (22 Oct 2012), the Tax Court, reviewing a case on remand from the Fifth Circuit, determined that the value of a conservation easement was very close to the initial award.
Minnick:
In Walter C. Minnick et ux. v. Commissioner; T.C. Memo. 2012-345; No. 29632-09 (16 Dec 2012), the Tax Court denied a charitable deduction for a transfer of a conservation easement.
Scheidelman:
In Huda T. Scheidelman et al. v. Commissioner; T.C. Memo. 2013-18; No. 15171-08 (15 Jan 2103), the Tax Court determined the valuation of a conservation easement. In the initial Tax Court case, the judge held that a percentage method valuation was improper and denied the deduction. In Scheidelman v. Commissioner, 682 F.3d 189 (2 D Cir. 2012), the Court of Appeals determined that the appraisal did meet the minimum requirements and remanded the case to Tax Court.
Giovacchini:
In Estate of Shirley C. Giovacchini et al. v. Commissioner; T.C. Memo. 2013-27; No. 20122-09 (23 Jan 2013), Tax Court Judge Wherry determined the value of High Meadows, an estate property near Lake Tahoe. The decedent's father and grandfather purchased High Meadows in 1929. It is approximately 2,400 acres and is south of the Heavenly Valley Ski Resort near Lake Tahoe, California. The terrain is very rugged and ranges from 6,600 ft. to 9,200 ft. Access is through land controlled by the U.S. Forest Service.
Belk Jr:
In B.V. Belk Jr. et ux. v. Commissioner; 140 T.C. No. 1; No. 5437-10 (27 Jan 2013), theTax Court held that a conservation easement charitable deduction was denied because the deed was not "in perpetuity."
Pollard:
In James M. Pollard v. Commissioner; T.C. Memo. 2013-38; No. 22950-09 (6 Feb 2013), the Tax Court denied a charitable deduction for an easement that was required in order to obtain a land-use exemption.
Gorra:
In George Gorra et ux. v. Commissioner; T.C. Memo. 2013-254; No. 15336-10 (12 Nov 2013), the Tax Court determined that a façade easement was valid. However, there was only a 2% reduction in value and the gross valuation misstatement penalty applied.
Kaufman:
In Gordon Kaufman et ux. v. Commissioner; T.C. Memo. 2014-52; No. 15997-09 (30 Mar 2014), the Tax Court reconsidered a case on remand from the First Circuit.
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