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When estate or tax planning, there may be reasons to gift your property, or a portion of it, rather than selling it. If you’re facing a large tax liability, or simply want to offer your property to help another individual or charity, then gifting a single family home, multifamily property, piece of land, or commercial building may be a beneficial and prudent option.
When selling or gifting a piece of property, depending on who it is going to, you can trigger gift taxes and capital gains taxes. The following are some ideas for how to do it with maximum benefits.
Gift the property to a family member or friend
The IRS annual gift tax exclusion is currently $15,000 per individual and $30,000 to married couples, which means anything valued below that doesn’t have to be claimed on your taxes. If you gift more than this amount, then you’ll need to file Form 709 with your taxes that year, and it is recorded to go against your lifetime gift tax exclusion, which is currently $11.4 million with a spouse.
Certain other property gifts are excluded from taxation, such as tuition or medical expenses you pay for someone, gifts to a political organization for its use, and gifts to a spouse.
Donate a conservation easement
If you donate a conservation easement to a qualified land trust, you can save big on federal, and potentially state and local taxes, especially thanks to a 2015 boost by Congress.
If you’re a farmer or rancher, the IRS allows you to deduct 100% of your annual income for 16 years, while other donors can deduct 50%, as a charitable contribution for the easement.
A land conservation easement must be donated to a qualified land trust. It is a legally, permanent, and enforceable agreement between property owner and the easement holder that it will serve certain conservation purposes. Property owners retain most rights, except to develop or further improve the property.
Say you own five acres of land, and you want to donate three of them to a land trust that will ensure the land can become a subdivision. The development value of that land is $1 million, and its value with the easement is now $500,000. The value of the easement is then $500,000, and your income is $100,000 per year. If you’re a farmer or rancher, you essentially won’t pay federal, and sometimes state income taxes on your income for five years, until the value of the easement is realized.
Some states, such as Maryland, offer even sweeter deals. If you donate a conservation easement to the Maryland Environmental Trust or the Maryland Agricultural Land Preservation Foundation, you also get up to $80,000 in state income tax credits, and property tax credits for 15 years. The property has to meet certain criteria to be accepted.
New York state offers property owners a rebate of 25% of property taxes up to $5,000 annually, when land is donated to a government agency or the Hudson Highlands Land Trust.
Gift the property to charity or nonprofit
If you were to sell your property, you would have to pay capital gains taxes on its appreciation, after your cost basis. So rather than sell your property and gift the proceeds to charity, you should gift and deduct it at the fair market value. That’s because a qualified charity or nonprofit would not have to pay taxes, netting the beneficiary more, and saving you the taxes.
You can deduct the property's fair market value as of the date of the transfer, but there are some stipulations and factors for how to determine what that is. You should have a qualified appraisal, sales comparables, replacement cost data, or other expert opinions to back up your claim. The income tax deduction immediately applies in the year in which the contribution was made and you can carry forward the amount for five years. The deduction is limited to 50% of your adjusted gross income (AGI) for cash gifts and 30% of AGI for appreciated securities and real estate. This can be extra beneficial if you’ve received a windfall that year, such as an inheritance or sale of a business.
The organization you gift it to must meet the criteria of section 170(c) of the Internal Revenue Code.
In addition to the charitable contribution deduction, which is not currently capped at the federal level, you may be eligible for tax incentives in certain states, such as Maryland’s Community Investment Tax Credit, which allows you to claim a credit of up to half the fair market value of real property to pre-approved organizations, up to a $250,000 limit.
North Dakota residents can receive a 40% income tax credit on the value of a property gift to the University of North Dakota Foundation (there’s a minimum of $5,000 annually), and individual businesses can carry forward unused credits for three years.
Talk to a financial advisor in your state to see what specific opportunities may be available there.
Use a donor-advised fund
A donor-advised fund (DAF) is essentially a charitable investment account through most major brokerages, in which you can donate a piece of real estate and get an immediately tax-deductible donation. If you want to plan for the future, you could donate the property now and allow it to appreciate and bring in income tax-free until it’s time to transfer the property. DAFs are gaining popularity, with contributions reaching $29 billion in 2017, according to the National Philanthropic Trust.
Though it can be extremely beneficial, DAFs are highly underutilized for real estate -- less than 3% of total charitable giving comes from real estate gifts, according to the American Endowment Foundation.
There are a couple of considerations when going this route, however, which is that the property is heavily appreciated or expected to heavily appreciate, and that the property must generally be free of liens and encumbrances.
Fees for using this vehicle could range from a tenth of a point to over a point, depending on the value of assets in them. If you wish your gift to stay anonymous, this is a good way to do it; just make sure you let your DAF know.
If you’re interested in a DAF, make sure you choose one that aligns with your long term goals and plans. Various DAFs have required minimum starting account, grant, and minimum advisor-managed amounts. For example, Schwab Charitable Fund requires $5,000 to start, while Vanguard Charitable requires $25,000 to start. Ask your prospective fund representatives the following questions:
- Are there setup, termination, or other fees? If so, how much?
- Are you affiliated with any specific organization?
- How involved do I need to be in the management of the property? What sort of business decisions are prudent when it comes to the property over the next few years?
- What strategies do you recommend for maximizing this benefit in my state?
Consider gifting property as part of your overall plan
The opportunities and benefits for gifting a piece of property may work for or be important to some people more than others. It helps to consider these options when writing your overall real estate investing strategy or business plan, well before you exit or exchange a property, so that you can execute it without headache and when the time is right. A competent financial advisor can help you weigh the pros of cons and various gifting strategies versus selling a property outright.
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