Gifts of Real Estate
"Barnabas…having land, sold it, brought the money and laid it at the apostle’s feet." -Acts 4:37
Avoid capital gains tax and redirect funds to charity through a partial sale/partial gift of real estate.
It is not new for the church to need funds to meet financial needs. Even the church in Acts had financial needs among them. One way the apostles received funds to meet these needs was through the sale of land and houses owned by believers.
“. . . For as many as were possessors of lands or houses sold them and brought the prices of the things that were sold . . . Barnabas . . . having land, sold it, and brought the money and laid it at the apostles’ feet.” -Acts 4:34-37
Similar to Barnabas in Bible times, today we can still give land and houses to support church alms funds and charities. Donating highly appreciated real estate itself is an effective way to give to charity, because it usually provides a greater tax deduction than if the owner sells the property and donates the cash proceeds.
But tax savings alone should not be the reason to give to charity. Giving should first be an expression of worship from a heart that loves God, cares for His people in need, and desires a lost world to hear the gospel. While it is secondary, it is simply good stewardship to save taxes where regulations permit, allowing us to give more funds to charity.
Property generally appreciates in value, especially if it is owned for a long time. When it is sold, taxes must be paid on the difference between what the seller paid for it and what the seller received in the sale. This difference is referred to as the “capital gain.”
Capital gain is calculated by taking what the seller paid for the property, adding the cost of improvements, and then subtracting depreciation, if any, from the sale price. Capital gains are subject to a special tax called capital gains tax, if the property was owned for at least one year. The Federal tax rates vary from zero to 20 percent, based on the seller’s tax bracket and an additional state tax.
A seller has three options for dealing with capital gains tax.
- Pay the tax. This is the least complicated but most expensive option. It reduces funds a donor otherwise may give to charity.
- Postpone the tax. This can be done through a like-kind exchange of real estate, under a special section of the tax code. While this avoids capital gains tax at the time, if the property is sold later, higher capital gains tax must then be paid.
- Minimize or avoid the tax. This can be done in several ways. An installment sale may help minimize the tax by spreading payments out over a number of years, which may enable the tax to be paid in a lower tax bracket. Or if the property is transferred after death, the heirs do not have to pay capital gains tax. While this may sometimes be the best plan, often people want to sell their estate because they need the proceeds to cover living expenses during their lifetime.
Another way to minimize or avoid capital gains tax is by donating some or all of a property to charity during one’s lifetime. Donating the entire property prior to a sale or agreement of sale, including verbal understandings, completely avoids capital gains taxes if the seller does not need the income from the sale. If a seller needs the proceeds from the sale for living expenses later in life, they can donate a portion of the property and sell the balance for cash.
In such a transaction, the buyer would then purchase the donated portion from Anabaptist Foundation and the other from the seller. The seller receives a tax deduction for the portion donated to charity before the sale, which offsets all or part of the capital gains tax on the remaining portion that is being sold. This is made possible by donating an interest in the property prior to the sale rather than cash after the sale.
When a portion of appreciated property is donated to a charitable organization prior to a sale, the charitable deduction is based on the fair market value of the property. When the remaining portion is sold, the seller recognizes a lower sale price, with a lower capital gain, plus the seller now has a fair market value tax deduction from the donated portion, which reduces the taxable gain. The result is being able to redirect dollars to charity that would otherwise go to pay taxes.
However, if the property is first sold and then a cash donation is made to charity, the donor will be taxed on the entire amount of appreciation and owe tax on the entire capital gain to the government. But that tax is reduced or avoided when all or part of the appreciated property is donated directly to the charitable organization prior to the sale.
Anabaptist Foundation is able to receive real estate donations and sell them to generate cash funds. After the donated property is sold, the Foundation opens, or uses an existing Charitable Gift Fund account for the donor. The proceeds of the sale are put into this donor advised fund. The donor may then advise how they wish the funds to be distributed, whether to their church or to qualified charities they wish to support.
Some Things to Remember:
Donations of cash or non-appreciated property may be deductible up to 60 percent of the donor’s adjusted gross income (AGI). But with donations of appreciated property such as real estate, the deduction is limited to 30 percent of AGI. However, if the deduction from a donation exceeds the amount which the donor can deduct in one year, the balance of the deduction can be carried forward an additional five years and used to offset taxes in subsequent years.
Even though a property has appreciated in value, it must have been owned for one year or longer in order for the appreciation to be taxed as capital gain. Otherwise, the tax deduction will be for the cost basis in the property rather than its fair market value.
Other types of property, such as stocks, bonds, mutual funds, and certain tangible personal property, may also be donated to offset capital gains tax in the same way.
Property must be debt-free to be donated in this way.
Property must be free from environmental contamination or other encumbrances.
Property subject to a written sales agreement cannot be donated in this way. Because the property is under contractual obligation, it can no longer be a gift that the donor relinquishes control over.
Properly planning a partial-sale/partial-gift transaction of real estate generally takes a minimum of 60 days. During this process, Anabaptist Foundation works closely with the donor’s legal counsel and tax advisor to generate a tax deduction that meets the donor’s objectives.
Example:
Meet Joe, a 60-year-old farmer committed to helping his church and funding the work of God’s kingdom. Joe bought a farm about 25 years ago. Now his children are grown and have all left home, and Joe and his wife want to sell the farm and move to a smaller place.
Joe knows he has several options. He can sell the property and make a cash donation from the proceeds. The fair market value of Joe’s farm is $500,000. He paid $100,000 for it. This results in a capital gain of $400,000. While Joe has tithed regularly on the income earned each year on the farm, he also wishes to give 10 percent, or $40,000 of this gain to charity.
Joe’s combined federal and state tax bracket is 22 percent, which results in a capital gains tax liability of $88,000 when he sells the farm. After paying his capital gains tax and giving 10 percent of the gain, he has a net of $372,000 left over in the bank.
Another option is to donate a portion of his property to Anabaptist Foundation prior to the sale. If Joe and his wife donate 35 percent of their farm to Anabaptist Foundation prior to the sale, they reduce their capital gain from $400,000 to $260,000 and capital gains tax liability from $88,000 to $57,200. By making this donation, they receive a charitable deduction of $175,000—the fair market value of their gift to charity—resulting in a tax deduction of $61,250, based on his tax rates.
This tax deduction more than offsets the $57,200 capital gains tax on the sale of the farm. Joe and his wife end up with $329,050 before income taxes, rather than $372,000, but they are blessed by having redirected a substantial amount of dollars to their church and charities they support. While they have $42,950 less in proceeds from the sale, they have been able to leverage their giving and fund the Lord’s work by an additional $135,000.
How can real estate be donated to Anabaptist Foundation?
Contact Anabaptist Foundation
To learn more, contact Anabaptist Foundation at (800) 653-9817 before you make a sales agreement or enter a verbal understanding. Individual situations and tax brackets vary, producing different results.
Review Your Situation
Foundation staff will review your situation and provide a non-specific calculation of the donation that would offset your capital gains taxes. You must rely on your accountant and tax advisor to plan the specific tax effect of your donation to Anabaptist Foundation.
Make Your Gift
You are under no obligation to make a gift to charity by making an inquiry. Anabaptist Foundation is a neutral intermediary with no programs of our own for which we raise funds. After we deduct direct expenses and a nominal fee, all funds are distributed to the church and charities of the donor’s choice.
NOTICE: This article has been prepared for educational and informational purposes only. It is not legal advice nor legal opinions on any specific matters. You will need an attorney from your state to draft and execute your documents. You should seek the counsel of your accountant or tax advisor.