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Real Estate Gifts: 5 "Must Cover" Issues
By Bethel Ruest, Gifts Administrator
When working with a donor on a proposed gift of real estate to your organization, you need to gather some key details early in the process. By asking these questions up front, you can position yourself to determine the appropriateness of the gift and best meet the donor’s needs.
The top 5 things to cover in your first contact about a potential real estate gift:
- What's the property worth?
- Does it have outstanding mortgages?
- How is the property owned?
- What type of property is it?
- What's the donor’s intent?
Let's look at them each in turn.
1. What's the property worth?
Formally, the gift value will be established by a qualified appraisal. But it's important to know what your organization's gift acceptance policy says about how much the property has to be worth in order to make it worth accepting. For example, at Mayo Clinic, real estate has to be over $100,000 in value for an outright gift, and over $125,000 if funding a trust (assuming $25k for expenses).
One good way to start is by asking if the property is currently listed for sale. If so, at what price and for how long? Have there been any offers?
2. Are there any outstanding mortgages on the property?
When mortgaged property is gifted and transferred to a charitable remainder trust, several complex tax issues are involved. For instance, if appreciated property subject to a mortgage is given to charity, the donor will realize a portion of the appreciation as a capital gain.
So it's always best to take a property that is free of any and all mortgages. In fact, in my current work at Mayo, our policy doesn't allow for gifts of mortgaged property. When a donor is interested in giving a mortgaged property to Mayo, we'll ask if there's a way to pay off the mortgage, perhaps by transferring it to another property so it'll be free of debt.
If you do take on property that will be transferred to a CRT (charitable remainder trust), keep in mind that there will likely be several complicated tax issues.
3. How is the property owned?
Is it held by:
- The donor as an individual?
- Multiple owners (joint tenancy or tenants in common)?
Why this matters: If the property is going to be put into a Trust.
If the property's held by an individual, the matter is relatively straightforward. In the case of multiple owners things get a little more complicated--they all have to be on board. With partnerships and corporations, it can be a confusing matter to determine who gets to take the charitable deduction. Also, in the case of a corporation, the complexity of the transaction can skyrocket depending on if the business is a C- or S-corp.
4. What type of property is it?
The most common types of property: Residential, commercial, agricultural, recreational, multi-family, cooperative, condominium, and raw land.
This is noteworthy because your organization may require additional resources required to process the gift, depending on the type of property.
The order of how complex properties are to process and accept, from least to most:
- Raw Land (this can have lots of hidden assessments and various red flags)
5. What are the donor’s intents and expectations?
This of course is crucial to understand. Is the property:
- An outright gift?
- An income-returning gift (as with a flip charitable remainder unitrust)?
- A retained life estate (RLE)?
- A bargain sale?
An outright gift is simplest because you know the donor has no income expectations.
In the case of an income-returning gift, donors are dependent on your organization liquidating the property at a good price so that they receive a higher guaranteed income. Mayo uses a side agreement for an RLE, so as to spell out responsibilities and expectations while the donor is living there. It's in our best interest to make regular site visits to the property.
It's highly recommended to have the donor complete a real estate application, as this is a great way to garner additional details and supporting documentation.