Even in this booming commercial real estate environment, you or your clients may be faced with the dilemma of holding real estate they no longer want and are having a difficult time selling it. Rather than holding on to it with all the expenses and liabilities of continuing ownership, an alternative is giving the real estate to a legitimate charity that can benefit from the gift.
The charity must have a 501 (c) 3 tax designation from the IRS for the donor to be eligible for a tax deduction. Guide Star provides a lot of information about charities, including the 990 forms filed with the IRS.
Here are a few considerations:
• The donor needs to define its costs—both real and intangible—for continuing to own the property. Interest rates haven’t risen (yet), but property taxes, insurance and maintenance expenses are rising. Plus, just the costs in time and effort to manage the property may make it less valuable to the owner.
• The donor needs to determine the benefits of donating. Generally, gifts of appreciated real estate are deductible to the extent of the fair market value of the property. Donors must consult with their tax counsel to fully understand any potential tax benefits as well as the specific paperwork required for both the donor and the charity.
There also may be significant positive publicity that could considerably enhance the donor’s reputation, market presence and stature. These benefits might even outweigh any potential tax benefit.
So, what are some of the additional costs and considerations?
Because this is a donation to a charity, the donor should be prepared to pay some or all the costs normally associated with closing any real estate transaction. In addition to an appraisal that will be necessary for the donor’s taxes, other items may include an updated survey, engineering and environmental studies, title insurance and legal fees.
How does the donor find the right charity for its property?
Most individuals will select the charity that holds a personal interest. Other donors, like corporations or foundations, may select charities with similar missions or interests. They may also be past contributors, have had representatives on the board of directors or know key individuals associated with the charity. Donating to a trusted and reputable charity capable of accepting and managing a gift of real estate is very important.
Charities will want the real property to further their charitable purposes. They may not have a use for the property and would prefer to immediately sell it to obtain cash or swap it for a more desirable property. If the donor wants to see the property put to a specific long term use by the charity, the donor must select the charity carefully, but give them the flexibility to sell the property in the future if it no longer furthers their mission.
Suppose the charity approaches the donor first?
Sometimes a charity looking for property will ask the owner of the desired property to donate or sell it at a price substantially below market value. In both instances, the donor and the charity must go through the same due diligence process. Costs involved in performing the studies, obtaining a survey and title insurance are typically negotiable in this situation and the donor should explore those with the charity.
Is the donor truly a candidate for giving away real estate?
Donating real estate works best when the donor’s primary motivation is charitable and personal, and corporate tax benefits are secondary. If the donor views this process as “just another business deal,” chances are that the many steps required will prove too frustrating or cause resentment against the charity, especially if the transaction runs into the inevitable “hiccups” that frequently occur in normal transactions.
However, when everyone performs his or her job responsibly, thoughtfully, and enthusiastically during the donation process, the outcome could provide huge benefits for both the donor and the charity. In that case, it is the right time to give the gift of real estate.
Eliza Solender is the president of Solender/Hall, Inc. a commercial real estate brokerage firm that specializes in representing nonprofit organizations. Contact her at [email protected].