If you’ve owned your home or other real estate for a long time, no doubt it has increased in value significantly. Home Gifting can help you save real estate taxes on your Main Line real estate property. What happens if you sell the property? First of all, the sale is subject to capital gains tax on the property’s appreciation. If the property has been your main home for at least two of the past five years, you can exclude up to $250,000 of gain ($500,000 for married couples). However, this opportunity to avoid capital gains tax doesn’t apply if the property is a vacation home, land or any real estate other than your primary residence.
Before you sell your Main Line real estate, consider a new option. Home Gifting offers you options. You can give the property outright, place it in trust, retain the use of it for life or give it by will. All of these methods will enable you to enjoy personal financial benefits while supporting our work in a meaningful way. There are significant tax advantages for “gifting” real estate. It is sometimes possible to convert land and other real property into an income stream rather than it being a drain on resources. Why do people”gift” real estate rather than sell it?
- They own land which has appreciated in value.
- Heirs who are already provided for, or who would prefer cash as their inheritance rather than the real estate.
- An estate tax problem.
- A desire for a sizable income tax charitable deduction.
- A need for increased income now and in the future.
- A strong aversion to paying capital gains taxes.
There are several ways to make a gift of Main Line real estate:
An outright gift made immediately. Such a gift maximizes the income tax charitable deduction and removes the property from the donor’s taxable estate. A gift of a partial interest in the property. For example; a donor might contribute a 50% interest in a vacation home to the person or organization of their choice. A simple bequest of real estate. By leaving real property to someone or an organization in your will you avoid having the value of the property taxed in your estate. A gift of a remainder interest in a residence or farm. The donor in this case deeds the property to the Lincoln Center, Inc. now, and retains for herself the right to continue to live in the residence for the rest of her life. The life-estate can be for more than one lifetime. Donor and spouse, for example, could be the life-tenants. Life-tenants need not be related. A gift of real estate to a charitable remainder unitrust. The trustee reinvests the sale proceeds in order to pay the donor income either for life or for a term of years.
Tax Benefits of an Outright Gift:
When you make an outright gift of real property held for more than a year, you obtain an income tax charitable deduction equal to the property’s full fair market value. This deduction lets you reduce the cost of making the gift and frees cash that otherwise would have been used to pay taxes. By donating the property, you also avoid capital gains tax on the property’s appreciation. Also, the transfer isn’t subject to the gift tax, and the gift reduces your taxable estate.
Example: Sally gifts a vacation cottage she no longer uses. It originally cost $50,000 but is now worth $150,000. She gets a $150,000 charitable deduction, which represents a tax savings of $42,000 in her 28 percent tax bracket. And she completely avoids tax on the $100,000 of appreciation. Now she no longer has to maintain the cottage, and the property won’t be taxable in her estate.
Your deduction for a gift of appreciated real estate in any year is generally limited to 30 percent of your adjusted gross income, with a five-year carryover of the unused deduction. If you elect to base your charitable deduction on the cost of the property, this raises your AGI limitation to 50 percent with a five-year carryover, but this has implications for all gifts made during or carried over to that year. For real estate you’ve held only short-term, your charitable deduction is limited to the property’s cost basis, but there’s still no tax on the appreciation. The deduction may be claimed up to 50 percent of your adjusted gross income, again with a five-year carryover for any excess value. Your gift is usually effective when a properly executed and notarized deed, suitable for recording, is delivered. The amount of your deduction for a gift of real estate (if more than $5,000) must be substantiated by a qualified appraisal of its fair market value.
Give Your Home But Enjoy Life Use:
Here’s another home gifting option. Let’s assume you like the tax advantages a charitable gift of real estate would offer, but you want to continue living in your personal residence for your lifetime. You’d like to retain the right to rent your house or make improvements. You may also want a survivor (perhaps your spouse) to enjoy life occupancy. But, ultimately, you’d like for a charitable organization to receive the property. By deeding your home to an organization now, subject to all these rights, you can still obtain valuable tax savings. This arrangement is called a retained life estate. Even though the non-profit would not actually take possession of the residence until after the lifetimes of the tenants you’ve named, you receive an immediate income tax charitable deduction because the gift cannot be revoked. The amount of the deduction depends on the value of the property and your age (and the age of any other person given life use). You can set up a retained life estate if you want someone other than a spouse to have use of the property after your lifetime. Leaving a home to a spouse through a will or some form of joint ownership generally does not result in a federal estate tax under current laws. However, if you want one of your children or a relative or friend to live in the home after your lifetime, you may find that estate taxes will have to be paid to leave the property to that person. With this kind of gift, you retain the rights and responsibilities of ownership-other than disposing of the property after your death. You may even decide to move out temporarily or permanently. Should you rent the home, all of the rent belongs to you. You can make a retained life estate arrangement with any personal residence, including a farm, vacation home, condominium or stock in a cooperative housing corporation (if it’s used by you). A farm may include acreage with or without a house.
Obtain a Life Income From Your Gift:
Instead of making an outright gift of real property or establishing a retained life estate, you can use unmortgaged property to fund a qualified charitable remainder trust. Once the property has been transferred to the trust, the trustee can then sell it and invest the proceeds in income-producing securities, which become the source for lifetime income payments to you and any other recipient you name. When the trust terminates, the organization or person you gifted the real estate to receives the remainder (without exposure to estate taxes when spouses are the only income beneficiaries).
A charitable gift of real estate is advantageous for many reasons. Either an outright gift or a remainder interest results in valuable income and estate tax deductions, and tax on the capital gain can be avoided. A “bargain sale” to someone gives you some money back and reduces your capital gains tax exposure. A gift in your will assures that the value of the property will qualify for a charitable deduction for estate tax purposes. Giving someone outright use of the property now will free you from the responsibilities and costs of looking after it.
The information on this site is not intended as legal, tax or investment advice. For such advice on home gifting options , please consult an attorney, tax professional or investment professional.