Help your favorite charity and get some income at the same time
Are you tired of being a landlord? Do you have a second home you use infrequently? Would like to sell your primary residence, but you’ll have capital gains to pay with the sale? You might be a good candidate to donate your appreciated real estate to your favorite charity. Not only can you avoid capital gains tax, you can reduce your taxable estate, get some income, a charitable donation and of course, you would be helping a charity fund their mission.
Charities have had a tough time of it in this economy just as so many people have. Planned giving has become a much more prevalent tool in the non-profit world as endowments and capital campaigns need funding and financial sources are drying up. Planned giving is essentially you, as part of your estate plan, including a charity in your estate.
There are many vehicles to make such a contribution, but the basic premise is the Charitable Remainder Trust (CRT), which can also be used to donate appreciated stock, life insurance and retirement plans. The trust (which you set up in conjunction with your charity) irrevocably transfers your asset to the charity, which specifies the terms of how much income you would get as a result of your donation and for how long. Once you (and your heirs if it’s set up that way) pass away, the remainder of the asset goes to the charity.
Here’s an example:
- You live in your primary residence, which is paid off.
- You have lived it in it for sometime and it has appreciated considerably.
- You would like to scale down into a smaller condominium, which would be easier to maintain. If you sell your primary residence, you would have a significant capital gains tax.
- You would like some additional income.
With a donation through a CRT, you may be able to:
- donate half the proceeds of your home sale (avoid capital gains tax and get some income which is based on a period of years depending on life expectancy)
- use the other half to buy your condo (reducing your capital gains on the portion of the proceeds you keep to purchase your replacement residence)
- take your property tax base with you to the new condo (over 55 one time exemption -must be in San Francisco or a reciprocal county)
- get a donation on your taxes
- Note this MUST happen in a CRT or similar vehicle-NOT after the sale has taken place. There are rules for reporting and some fees-both upfront and annual to administer it.
Of course, you could do the donation the old fashioned way, which is to either give it to the charity outright, or bequeath it as part of a will or trust. You could also donate your primary residence to your charity and live in it until you pass away (a life estate).
This may all sound great, but do not make any decisions without first getting input from various advisors such as your financial planner, accountant and estate attorney to see how best any of these tools can fit your needs and goals. It’s always important to look at your tax and planning consequences before making any decision.
Who says you can’t have your cake and eat it too? Do something nice for your favorite charity; you’ll feel good and you may get to take advantage of some pretty outstanding benefits.
Eric Castongia, Residential Sales Specialist at Zephyr Real Estate provided the information in this article. Eric can be reached by e-mail at Eric@SFHotBuy.com, via web at www.SFHotBuy.com, or via mobile phone at (415)307-1700. DRE Lic. No. 01188380