Friday April 26, 2024

4.7.4 Gift of Personal Residence or Farm

Gift of Personal Residence or Farm

Life Estate Reserved:  An individual may receive a charitable income tax deduction for the gift of a remainder interest in a personal residence or farm.

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.

Life Estate Reserved
An individual may receive a charitable income tax deduction for the gift of a remainder interest in a personal residence or farm. See Sec. 170(f)(3)(B)(i). To do this, an individual deeds the personal residence or farm to a qualified charity but reserves a life estate in the property. As a result, the donor receives a charitable income tax deduction equal to the present value of the remainder interest. For a full discussion of this planned giving option, see GiftLaw Pro 3.7.

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 take only 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 receive only 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 recordkeeping. 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 Gift of Personal Residence or Farm

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.

Private Letter Rulings

PLR 200039031 QPRT for Tenants in Common Property Approved:   Husband and wife own a personal residence as tenants by the entirety. They propose to sever and convert the property to tenants in common. Each will then transfer their one-half interest into a QPRT for a term of 15 years. At the expiration of the 15 years, the home will be transferred to children.

PLR 200118031 Transfer of Personal Residence to QPRT is Approved:   Taxpayer, a resident alien, owns property that consists of land and a home. The home is Taxpayer's residence and will, according to Taxpayer, continue to be so into the future. The home has never been rented or used for commercial purposes. Taxpayer now intends to transfer the home into an irrevocable trust for tax planning purposes.

Related Topics on Gift of Personal Residence or Farm

3.4.5  Gift Annuity for Home:    The gift annuity for home is a combination of two qualified charitable agreements. The donor may desire to live in his or her home for life and to receive annuity payouts. If the donor were to create a life estate, the remainder could be transferred to charity and the donor would receive a charitable deduction.

3.7.1  Personal Residence or Farm:    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.

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).

Patel:    In Upen G. Patel et ux. v. Commissioner; 138 T.C. Memo. 23; No. 11694-09 (27 Jun 2012), the full Tax Court held that a transfer of a home to a fire department for training purposes was a nondeductible partial interest.

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