Debunking Six Myths about Real Estate Gifts

By Dennis Bidwell
June 2014

Myth #1: If a property owner is offering a piece of real estate as a gift, there must be something wrong with it. Most of the time this is simply not true. These days property owners are exploring giving away perfectly fine pieces of real estate because: 1) they have grown weary of continuing to own and manage a property — often a second or third residential property — they no longer use; 2) they are wary of marketing the property themselves; 3) they like the idea of making a wonderful gift while retaining their cash; 4) they can use the substantial charitable contribution deductions triggered by such a gift, and they like avoiding or reducing the capital gains taxes that might have been payable in the case of a sale.

Non-profits that have ramped up their real estate gift activity have grown very good at quickly deflecting the problematic gift offerings, and spending their time instead on the promising real estate gift possibilities. Also, charities that actively pursue real estate gifts – through marketing and by initiating conversations with prospects – tend to see a much higher quality of property offered up than those who don’t market and see only the occasional, often problematic, property that is sometimes being shopped around.

Myth #2: The staff time and upfront expenses of evaluating and structuring a possible real estate gift just isn’t worth it. In the 2009 IRS report on non-cash charitable gifts the average real estate donation for donors 65 and older (the vast majority of real estate donors) was reported as $585,000. Yes, real estate gifts can be time-consuming and require some investment in due diligence investigations. And yes, not every gift explored makes it across the finish line. But, I would argue, the magnitude of real estate gifts more than justifies an investment in ramping up a carefully thought-out real estate gift effort.

Myth #3: Most gifts of real estate are deferred in some way, meaning we won’t have cash to use for many years. In fact, surveys show that more real estate gifts these days are given outright than through life income arrangements or subject to retained life estates. Outright gifts are often liquidated and fully useable by the charity in a matter of months.

Myth #4: Most property offered as a gift has a mortgage on it. This is not true. The vast majority of property offered as a gift of some sort is offered by donors over 65 years of age. And we know (from the Statistical Abstract of the U.S.) that 83% of the real estate owned by folks 65 and older is debt-free. In situations where a property is encumbered with a mortgage, there are often work-arounds making it possible to complete the gift nonetheless.

Myth #5: Property owners are resistant to having development officers talk to them about their real estate holdings. To the contrary, it is my experience that many aging owners of property welcome fresh new ideas about how they might dispose of real estate that is weighing on their minds. When a non-profit representative presents the outright gift possibility, or life income arrangements, or a retained life estate as a possible approach to a dilemma, the property owner often welcomes the introduction of new possible solutions. Whether a gift results from such conversations or not, it is my experience that the prospect usually appreciates the suggestions.

Myth #6: You should never accept real estate as the asset funding a Charitable Gift Annuity. The traditional reluctance to fund CGAs with real estate is gradually giving way to the realization that many property owners want to convert “non-performing” real estate assets into steady supplemental retirement income, wanting to lock in a return (as opposed to being exposed to the market variability of a real estate-funded Charitable Remainder Trust.) This transition is aided by the availability of various proven techniques for avoiding the liquidity risk associated with real estate-funded CGAs. Among these techniques: marketing of the property prior to the charity taking title; deferring the CGA one or more years, to allow ample marketing time; using a “charitable put option” to identify a qualified buyer prior to issuing the CGA contract; and making downward adjustments to the CGA payout rate to reflect the estimated holding costs and other expenses of working through the CGA arrangement.

Case Study: Real Estate-Funded Charitable Gift Annuities at Kendal Retirement Communities

by Dennis Bidwell
September 2012

Take-aways from these gift scenarios:

  1. Real estate-funded CGAs are attractive to many property owners wary of variable CRT payouts.  Also, the relative simplicity of a CGA contract, compared to a lawyer-intensive CRT document, is appealing to many donors.
  2. Many residents of non-profit retirement communities continue to own property—often a vacation home—long after they have moved in to their new community.  And many of these residents, as they move in to their eighties, are attracted to the prospect of having someone else assume responsibility for marketing their property.
  3. For non-profits, there are proven ways to manage the risk of CGAs funded with real estate. Besides deferring the CGA one or more years and making prudent adjustments to payout rates, the use of option agreements, pre-marketing and other techniques are available as risk-management approaches.

In recent years Kendal Charitable Funds (KCF), formed to support the charitable purposes of the Kendal network of non-profit retirement communities, has been offering to help communities structure, process and close real estate gifts, including charitable gift annuities. The marketing undertaken by Kendal has recently produced two real estate-funded CGA gifts that have worked out well for all involved.

The Wallaces (not their real names), residents of a mid-west Kendal community, had arrived at a point in their lives where continued ownership of their vacation home in North Carolina was more trouble than enjoyment.  With the agreement of their three children, they approached their Kendal community about donating their property in exchange for income for life.  KCF, working with the Wallaces, determined that the property was marketable and devoid of environmental issues.  Based on the Wallaces’ appraisal and local market investigations, KCF and the family agreed on the terms of a one-year deferred charitable gift annuity.  The face amount was based on the donors’ appraisal, but the rate was discounted from ACGA-recommended rates based on a conservative estimate of marketing time, holding costs and eventual sales price.  Fortunately, an abutting property owner stepped forward to express interest in the property, and KCF sold it to him without incurring brokerage costs.

When all was said and done, the Wallaces were able to turn over the marketing of their property to KCF, they began receiving their promised quarterly annuity payments one year later, they received a substantial income tax deduction, and they have the satisfaction of knowing they have made a very generous contribution to their Kendal community. At the time the CGA matures, Kendal Charitable Funds will remit to the Kendal community the balance in the CGA account, less the expenses incurred in structuring the gift at the outset.

A short time later, the Bigelows (not their real names), residents of mid-Atlantic Kendal community, expressed interest in donating their near-by home to Kendal in exchange for annuity payments for life.  Market investigations revealed that the home might require some investment before sale, and might represent somewhat of a marketing challenge. All of this was factored in to the discounted CGA rates agreed to by the parties. As with the Wallaces, the CGA was deferred one year, with a face value equal to the appraisal commissioned by the owners.  Despite deteriorating market conditions, a good local broker was able to obtain a buyer for the property, long before the first annuity payments to the Bigelows were due. The Bigelows were relieved to have KCF handle the marketing of their property, and were delighted to make a substantial gift resulting in lifetime income and a tax deduction.  As in the case of the Wallaces, KCF will remit the balance in the CGA fund, net of expenses, to the local Kendal community at the time the CGA has matured.

Kendal Charitable Funds and the Kendal communities expect that the example set by the Wallaces and the Bigelows will motivate other Kendal residents to consider similar gifts.

 

Real Estate Gifts and Non-Profit Retirement Communities

October 11, 2010

I have recently had occasion to work with several non-profit retirement communities, helping them attract and structure real estate gifts.  My experience with such communities is that their residents may have disposed of their primary home (though some still own them), but many of them continue to own a summer home on the lake or on the shore, or a farm, or an investment property.  Many times these property owners, as they age, are especially receptive to ideas about how they might dispose of their real estate in a way that benefits charities in their life (including the retirement community)  while addressing their tax planning and/or retirement income needs.

In other instances, I have seen non-profit retirement communities work with prospective new residents to see if a donation of their home could meet the entrance fee (or purchase price) requirements of moving into the community.

I have often wondered why more non-profit retirement communities don’t explore ways that they could provide a valuable service to their residents – helping dispose of increasingly burdensome real estate — while at the same time opening up the possibility of substantial charitable gifts, to their organization and others as well.

Why Not a Charitable Gift Annuity Funded with your Property?

October 9, 2010

Let’s say that you are in your 70s, and have for some years not been getting much use out of your vacation home on the shore. Instead, you’ve been renting it out more and more, and have become rather accustomed to the extra cash flow from your property.

But now, as you age, the hassles of maintaining the property (and of paying taxes, utilities, repairs, etc.) and carrying around that responsibility are starting to outweigh the benefits of property ownership. Which means it’s time to dispose of the property.

Let’s also say that you have watched friends go through this process, and this has left you dreading the task of listing the property, working with a broker, adjusting he asking price, fielding offers, and working the process all the way through to a closing. (Not to mention you’re not excited at the prospect of paying a very considerable capital gains tax upon the sale of your low-basis property.)

So, what is the alternative?

Well, if your financial situation permitted, you could make an outright gift of the property to a charity of significance to you. You would be eligible for a charitable tax deduction equal to the current appraised value of the property, there would be absolutely no capital gains tax paid, you would have made a magnificent gift. And the charity, not you, would assume all the responsibility for selling the property.

If you’re not in position to give it away outright, and instead need a continuing stream of income, perhaps you could talk with a charity of meaning to you about funding a charitable gift annuity with your waterside property. With a gift annuity, you would lock in a steady, regular income stream for the rest of your life, you would generate a substantial tax deduction, and you would pass on to the charity (as in the case of an outright gift) the responsibility for selling the property.

More and more charities are interested in working with property owners on this sort of arrangement, because they have become more adept at structuring the arrangement in ways that minimize the risks that they might need to begin making annuity payments prior to the time they’ve sold the property.  Also, an increasing number of charities are recognizing that many property owners want to roll their property into a steady income stream, not the variable income that would come from a charitable remainder trust.

If the situation above sounds a little bit like yours, talk with your advisors, or talk with your favorite charity, about the possibility of a charitable gift annuity funded by a property that you are ready to dispose of however reluctantly.