Real Estate as a Gift

Almost any type of real property—a personal residence, farm, vacation home, commercial building, or an undeveloped parcel of land can be gifted through a variety of strategies depending on your needs and desires.

If you have owned the property for longer than a year and the current value is greater than the purchase price, the property has a long-term capital gain. Giving it outright allows you to avoid tax on the gain, reduce your taxable estate by the value of the gift (for estate tax purposes), and receive a charitable contribution tax deduction for 100 percent of the property’s fair market value. The actual income tax savings depends on your tax bracket—you can deduct the value of the gift up to 30 percent of your adjusted gross income.

Gift of residence or farm with a retained right to use the property.

Because of special provisions in the tax laws, you can receive an immediate tax deduction, and you and your spouse can continue to live there for the rest of your lifetimes. The gifted property does not have to be your primary residence and, in the case of a farm, you do not have to reside on the property. Stock in a cooperative apartment that is used as a personal residence could also qualify.

When you retain the right to use the property, the charitable deduction is less than the full value of the property and equals the value of the remainder interest given—the IRS calculates the present value of what you will receive in the future. There are also charitable deductions available for estate or gift tax purposes, if the life interest is given to one or two individuals and the remainder interest is given to charity. In this case, the estate of gift tax deduction is equal to the value of the remainder interest.

Gift of undivided interest in property.

Gifting an undivided interest of your estate in a property that is jointly owned may qualify you for a charitable deduction equal to the value of your entire interest in the property. The gift is a fraction or percentage of each substantial right/interest in the property, and to qualify, the donated interest must extend over the entire term of your interest.

Bargain sale.

If you would like to make a charitable donation of an appreciated asset but it does not fit in your financial plan to gift the entire property, you may sell the asset to a charity for an agreed-upon amount that is less than the asset’s full fair market value. This transaction will be part gift and part sale, and you are entitled to a charitable deduction based on the difference between the sale price and the full fair market value (in essence, your gift). You incur tax only on the part of the appreciation attributable to the sale.

Conservation and agricultural easements.

If you would like to permanently limit the use of a piece of land in order to protect its conservation of agricultural value, you may want to consider establishing a conservation or agricultural easement. These easements are legal agreements between a landowner and a charity (or governmental agency) permanently limiting use of land in order to protect the land’s conservation or agricultural value. After establishing an easement, you can use, sell, or gift the land. Please note that you do give up some of the rights associated with the land after establishing an easement and that future owners are bound by the easement’s terms.