If you've owned your home or other real estate for a long time, no doubt it has increased in value significantly. What happens if you sell the property?
First of all, the sale is subject to capital gains tax on the property's appreciation. If the property has been your main home for at least two of the past five years, you can exclude up to $250,000 of gain ($500,000 for married couples). However, this opportunity to avoid capital gains tax doesn't apply if the property is a vacation home, land or any real estate other than your primary residence. Plus, there's the cost of marketing and selling real estate, which takes time and effort, even if you use professional assistance.
Before you sell real estate, consider a new option. If you'd like to help fulfill our mission, your property opens the door to a unique giving opportunity: donate the property to the Foundation. You can give the property outright, place it in trust, retain the use of it for life or give it by will. All of these methods will enable you to enjoy personal financial benefits while supporting our work in a meaningful way.
Tax Benefits of an Outright Gift
When you make an outright gift of real property held for more than a year, you receive an income tax charitable deduction equal to the property's full fair market value. This deduction lets you reduce the cost of making the gift and frees cash that otherwise would have been used to pay taxes.
By donating the property to the Foundation, you also avoid capital gains tax on the property's appreciation. Furthermore, the transfer isn't subject to the gift tax, and the gift reduces your taxable estate.
Your deduction for a gift of appreciated real estate in any year is generally limited to 30 percent of your adjusted gross income, with a five-year carryover of the unused deduction. If you elect to base your charitable deduction on the cost of the property, this raises your AGI limitation to 50 percent with a five-year carryover, but this has implication for all gifts made during or carried over to that year.
For real estate you've held only short-term, your charitable deduction is limited to the property's cost basis, but there's still no tax on the appreciation. The deduction may be claimed up to 50 percent of your adjusted gross income, again with a five-year carryover for any excess value.
Your gift is usually effective when a properly executed and notarized deed, suitable for recording, is delivered. The amount of your deduction for a gift of real estate (if more than $5,000) must be substantiated by a qualified appraisal of its fair market value.
Give Your Home but Enjoy Life Use
Let's assume you like the tax advantages a charitable gift of real estate would offer, but want to continue living in your personal residence for your lifetime. You'd like to retain the right to rent your house or make improvements. You may also want a survivor (perhaps a spouse) to enjoy life occupancy. But, ultimately, you'd like for a charitable organization to receive the property.
By deeding your home to us now, subject to all these rights, you can still obtain valuable tax savings. This arrangement is called a retained life estate. Even though the Foundation would not actually take possession of the residence until after the lifetimes of the tenants you've named, you receive an immediate income tax charitable deduction because the gift cannot be revoked. The amount of the deduction depends on the value of the property and your age (and the age of any other person who is given life use).
Tax Savings for Partial Use
Say you have a home you don't occupy year-round. You can make a deductible gift to us of an undivided interest, allowing us exclusive use of the property for part of each year.
A vacation home can be ideal for this purpose. For example, you could give the Foundation a half interest. You would continue to use the property for six months of each year while the Foundation, as half owner, would use it for the remaining six months. You receive an income tax deduction for the fractional interest contributed to us, based upon its market value. That interest will also lower estate taxes.
You can also give the Sedalia School District Foundation a remainder interest in the part of the property you retain. Then you would receive an additional income tax deduction, based on your age and other factors.
Bargain Sale Tax Benefits
You can sell long-term appreciated real estate to the Foundation for less than its value, subject to our consent. This transaction is part gift and part sale. You receive a charitable deduction for the difference between the sale price and the higher fair market value.
A bargain sale accomplishes the gift and provides you with immediate cash, while also relieving you of the time, effort and costs of a normal sale.
Giving Real Estate through Your Will or Living Trust
If making an irrevocable gift of the property through one of the options we've discussed is not to your liking, consider giving it to the Foundation in your will or living trust. Because your will or living trust is revocable (that is you can change your mind at any time during your life), you will not be able to take an income tax deduction, but the property will not be taxed in your estate.
If you wish, you can give another person life use before unrestricted ownership passes to the Foundation. Or you can bequeath full title to an individual if that person survives you, with our organization as the contingent recipient. When an individual is given life use, it is best to make it clear that he or she is responsible for maintenance, insurance, repairs and improvements.
If you don't need to make a new will or trust now for any other reason, ask your attorney to draw a brief codicil or trust amendment for this purpose.
A Summary of the Benefits
A charitable gift of real estate is advantageous for many reasons.
- Either an outright gift or a remainder interest results in valuable income and estate tax deduction, and tax on the capital gain can be avoided.
- A "bargain sale" gives you some money back and reduces your capital gains tax exposure.
- A gift in your will assures that the value of the property will qualify for a charitable deduction for estate tax purposes.
- Giving the Foundation outright use of the property now will free you from the responsibilities and costs of looking after it.