There’s probably not a homeowner alive who hasn’t thought about taking a match to a house that has languished unsold on the market for months, or perhaps years.
“If I could just burn the place down,” the notion often goes, “my troubles would be over.”
Luckily, few people act on such a felonious impulse. And why should they when the fire department will torch the house for them lawfully?
Local fire officials will gladly accept houses or other structures as donations. They can use almost any kind of building for practicing their fire-fighting techniques.
Of course, there’s a wee little tiny itsy-bitsy drawback to giving your house away to Sparky and his friends: You won’t get any cash for it.
Consequently, if the warm and fuzzy all-over feeling you’ll get from doing a good deed isn’t good enough, you’ll have to find another way to unload your white elephant.
If, on the other hand, cash isn’t your primary objective, donating your property to a tax-exempt charitable organization may be an avenue worth considering.
Actually, people give away real estate all the time. The American Association of Fund Raising Counsel in New York estimates that about a fourth of the nearly $130 billion contributed to schools, churches, museums, the scouts and similar groups in 1994 was real estate.
Some of the total came from corporations donating surplus real estate they no longer used or needed. But almost nine out of every $10 contributed to charity or other public entities came from individuals.
“We get a good share of real estate, everything from small private homes to commercial properties,” says Leo Geier, director of planned giving at the University of Maryland in College Park.
Just the other day, Geier was contacted by the mother of a recently deceased Maryland alumnus who is looking into the possibility of donating in his name a 5,000-square-foot oceanside house valued at $2.8 million in Harmony, Calif.
Why give your precious real estate away? Because you can deduct the full value of the property, including appreciation, on your federal income tax return. Yet you don’t have to report the appreciation as capital gains. In other words, you get two benefits in one.
“It’s hard to imagine a better tax savings device,” says MacKenzie Canter III, a Washington attorney who specializes in philanthropy law.
“You get a double tax benefit. Not only do you escape the tax on the appreciation, you enjoy the full benefit of a charitable donation equal to the property’s fair market value. And that can be extraordinarily attractive.”
How attractive? Consider this possibility:
You’re in the 31 percent tax bracket. You own free-and-clear a house worth $150,000 but you paid only $75,000 for it 20 years ago. Because you’ve owned it for more than a year, it’s considered a long-term capital asset.
If you sold the place outright, you’d have a capital gain of $75,000 and your tax liability would be 28 percent of $75,000, or $21,000. So the real liquid value of your property is $129,000, or $150,000 less $21,000.
Now suppose you donate the house to your local United Way agency. Then you’d be entitled to a charitable tax deduction of $150,000, and there would be no tax on the $75,000 gain.
In your 31 percent bracket, the tax savings would be $46,500. So the net cost of making a charitable gift of your $150,000 property would be only $82,500 ($150,000 less your $21,000 tax liability less your $46,500 tax savings).
Your charitable gift is deductible only up to 30 percent of your adjusted gross income in the year it is made. But any contribution above that amount may be carried over for up to five more years.
Furthermore, gifting real estate also avoids the hassles involved with selling. Just think: no sales commission, no fix-up costs, no prospects traipsing through your place at all hours of the day and night, and perhaps best of all, no haggling.
But wait: Let’s get back to our original premise, that you need to net at least some cash out of the deal so you can move onward. If that’s the case, consider what’s known as a “bargain sale.”
With this type of gift, instead of donating the property outright, you sell it to the charitable organization for something less than it’s full market value. That way, both parties come out ahead.
You not only get a deduction, you get some cash, and the charity can sell the place and pocket the difference between what it gave you and what it eventually gets for the house on the open market. In other words, sit back and leave the driving to them.
Here’s how a bargain sale might work: You paid $20,000 for your house years ago but it’s now worth $100,000. If you sell it at that price, you’d have to pay a 28 percent tax on the $80,000 gain, or $22,400.
Now say you sell it to your local VFW chapter for $60,000. You’d get to deduct $40,000, the difference between the property’s fair market value and the selling price, as a charitable donation.
Of course, you’d also have to pay the tax on your capital gain of $40,000. But that works out to $11,200, or half what you would have had to pay had you sold the place outright at its full value.
Alternatively, you could take your money in installments. That way, you could take the gift deduction in the year of the donation and spread the capital gains tax over several years. And you could deflect your tax liability still further by giving part or all of your gain away to your children or grandchildren.
Two important caveats:
– The above examples are extremely basic, but the topic is anything but simple. Don’t make any decisions without first consulting competent legal and tax counsel.
– Not all organizations qualify as tax-exempt charities eligible to receive deductible contributions. For a complete list of qualified, so-called Section 501Copyright(3) groups, request Publication 78 from your local IRS office.
