By Lew Sichelman
RISMEDIA, Sept. 12, 2007-(MarketWatch)-Question: I have owned a time-share in Southern California since the early 1980s. The maintenance fees have risen beyond reason and it is next to impossible to find a decent exchange for it. I would like to donate the time-share and take a charitable tax write-off. There are charities that accept time-shares, some of whom use Donate for A Cause. How can I verify who is legitimate and acceptable to the IRS? Also, how do I calculate the amount of the write off? Sharen Sherman
Answer: Anyone who donates real estate — or any other thing of real value, for that matter — should ask the charity for a copy of the Internal Revenue Service notification letter granting the organization charitable 501(c)3 status. Only gifts to groups that have gained that status are tax deductible.
Chase Magnuson, president of Real Estate for Charities (www.realestateforcharities.com), also suggests checking out the potential recipient on the Web site www.GuideStar.org. “Most charities have their tax returns posted on the site along with any derogatory government action taken against them,” he says.
As far as calculating the deduction is concerned, you must pay for a qualified appraisal of your property. The appraisal is necessary to support your “fair market value” deduction and should be attached to IRS form 8383, which will be provided by the charity when it accepts your real estate gift.
Q: Could you explain to me how the $500,000 capital gains exemption on a personal residence works with regard to donating that property to charity as opposed to selling it outright. My wife and I will eventually donate our residence to the University of Southern California for cancer research, probably in the form of a charitable annuity.
Assuming one is allowed the exemption on a charitable gift, if the house is worth $1 million and our basis is $250,000, that leaves $250,000 in capital gains. What is the best way to handle such a situation? I haven’t run this by the USC legal staff because it is probably several years away. Of course, if one of us dies in the meantime — we are in our late 70s — the problem becomes moot because of the stepped up basis. Gary Robb
A: An exchange of a personal residence for a charitable gift annuity doesn’t take into consideration the exemption because the property basis is allocated between the present discount value of the gift annuity and the gift component.
“The donor cannot take both the exemption and gift deduction in this process,” reports Chase Magnuson of Real Estate for Charities, my expert on these matters.
Magnuson suggests a more favorable arrangement is possible by having USC or another charity, if you so chose, enter into a “bargain sale” purchase of half your property and exchange the other half for a gift annuity. This way, he says, most, but not all, of your proceeds would be sheltered under the $500,000 family exemption.
“They could then take the untaxed cash and create a second gift annuity that provides them a gift deduction usable against 50% of their adjusted gross income rather than 30% the property equity would allow them,” he says. “But this only makes a difference should the donors expect to earn around $1,800,000 in adjusted gross income over the next six years. That’s what it would take for them to completely use a $600,000 gift deduction.”
As you can see, this is complicated stuff, so anyone considering donating their real estate should not do so blindly. Get professional advice. For what it’s worth to you, Magnuson says USC has “one of the best groups of professionals with which the donor could be communicating. They may have other options once the donor’s estate planning attorney crafts a plan for them.”
