5 Questions to ask before making a gift of real estate to Duke
Anne Sherman, associate director of gift planning, explains what you need to know about donating property to Duke
July 15, 2015 | by Anne Sherman ‘94
Charitable gifts of real estate, such as a vacation home, rental or investment property, farm, or (sometimes) a primary residence can make a big impact at Duke. Gifts of real estate provide scholarship support to numerous students, strengthen our academic programs, support athletic, engineering and other campus facilities. At the same time, a gift of real estate makes sense for many donors from a tax perspective.
Here are five questions you should consider before making a gift of real estate to Duke:
1. Has your property appreciated in value?
For many Americans, real estate is one of the larger assets to compose net worth, and much of that real estate has increased in value over the past two decades (Census.gov). If you have owned property for more than one year and it has increased in value, a gift of real estate may enable you to unlock the property’s full value and make a bigger gift than you thought possible.
The following is an example of how you can appreciate the full value of a property when making a gift of real estate to benefit Duke:
For example: Consider Mr. True Blue, who purchased a property in the mountains in 2009 for $40,000 (cost basis). The property has appreciated in value to $120,000 (fair market value). Mr. Blue contemplates selling the property, but knows he will have to pay capital gains tax, including Medicare surtax, on the appreciation (e.g., $80,000 * 23.8% = $19,040). Instead, if Mr. Blue donates the property to Duke, he avoids paying capital gains tax on the sale, and receives a charitable deduction equal to the property’s fair market value (e.g., $120,000 *39.6% = $47,520 in federal income tax savings). In this example, Mr. Blue’s $120,000 gift of real estate enables him to fund The True Blue Scholarship Fund for students enrolled in the Trinity College of Arts & Sciences, a legacy gift that would not be possible if he only donated proceeds from the sale of his mountain property.
2. When (if ever) does it make sense to donate the proceeds from a sale of real estate rather than donating the real estate itself?
In some cases, it makes more sense to sell the property first and then donate some or all of the proceeds from the sale to Duke. Discuss this option with your financial advisor if:
- Your property has depreciated in value or experienced only modest gain;
- You intend to give Duke your primary residence, in which case you may be able to shelter capital gains under the home sale exclusion (up to $250,000 for an individual and $500,000 for a married couple);
- Your property is subject to a mortgage or other restrictions;
- You have entered into a legally binding agreement with a buyer for a sale of the property; or
- Your property is unmarketable or subject to environmental liabilities.
3. Do you want to generate a stream of income through a gift of real estate?
With a gift of debt-free real estate to benefit Duke, you can create a stream of income for life or a period of years by establishing a charitable remainder unitrust (CRUT). You will receive a charitable deduction equal to part of the appraised value of the property and avoid paying capital gains tax on the sale of the property.
The following is an example of how you can turn a piece of real estate into an income-producing asset and make a significant gift to Duke:
For example: Ms. B. Devil owns a farm that has appreciated in value, is not subject to a mortgage, and generates little income. She does not want to lose the income from the farm entirely, but would like to give the property to Duke to support the Sarah P. Duke Gardens. After consulting with her financial advisors, she sets up a “flip CRUT” funded with the farm, and she serves as the initial trustee. Ms. B. Devil receives a charitable deduction equal to part of the appraised value of the farm, as well as a payout of net income (if any) until the farm is sold. When the farm is sold, she avoids paying capital gains and reinvests the proceeds of the sale through Duke’s endowment investment option. At this point, the CRUT flips to a standard unitrust that pays a fixed percentage (e.g., 6%) of the trust’s value for Ms. B. Devil’s life (starting in the year after the farm is sold). When Ms. B. Devil passes away, the trust’s assets will be used to fund the Ms. B. Devil Endowment Fund for the Duke Gardens, a gift that will keep the Duke Gardens in bloom for years to come.
4. Do you want to continue using your property during your lifetime?
If so, you can give Duke a remainder interest in your home or farm, and receive a current income tax deduction equal to the appraised fair market value of the home or farm minus your life estate. In this way, you can continue to live in your home or manage your farm throughout your lifetime, receive a current income tax deduction, and still make a meaningful charitable gift. Be sure to check out our previous post on retained life estates for more information.
5. How do you want to make a difference at Duke University?
A gift of real estate may yield tax savings for you and can result in a larger gift to Duke than you dreamed possible. From students to faculty, athletics to the arts, Duke University Hospital to Duke Chapel—what matters most to you?
Give one of our team of experts a call to explore how a gift of real estate can enable you to make a difference at Duke, or visit our website to learn more about gifts of real estate, tangible property, or securities.