Although the value of real estate has dramatically decreased in the last few years, selling property can still generate adverse tax consequences.
For example, if a mobile home park worth $800,000, encumbered by debt of $650,000 and with a tax basis of $200,000, is sold, the sale would generate $600,000 of taxable gain which would equal $90,000 of tax (assuming a levy of 15 percent). This would likely leave the owner with about $10,000 of proceeds from the sale after paying realtor fees and other costs.
Instead of selling the property, the owner might consider donating the property to his or her favorite charity. Such a donation would not require recognition of the $600,000 of taxable gain and would allow for a tax deduction equal to the fair market value of the property. In the above example, assuming there is no accumulated depreciation, a donation of the property would result in a $150,000 deduction against ordinary income and a tax savings of $52,500 (if taxed at a rate of 35 percent). Additionally, it is likely that the sale will generate a little more than $100,000 of cash for the charity, after paying the costs related to the sale. This could be a win-win for the owner and the charity.
Although donations of personal property are often as easy as dropping off a carload of household goods at Goodwill, the process of donating real estate can take time. The charity likely will want to conduct its own due diligence on the property and gather information from the owner about the property's overall condition, its income-producing capability and any environmental or title issues. An owner should expect a charity to conduct the same amount of due diligence as a third-party buyer would conduct. Also, although the costs of the charity's due diligence can often be deducted from the proceeds of the eventual sale of the property, a charity might require a commitment from the owner to reimburse the charity. Such a commitment would apply in the event the sales proceeds are insufficient to cover the charity's costs related to the property, including any debt-service payments required until the property is sold.
Unlike a donation to Goodwill where most items are gladly accepted, it is possible for the charity to decline to accept real property due to environmental or title issues or because it so highly leveraged that there is insufficient equity to support the time and expense of the charity to accept, market and resell the property.
As with any tax-related transaction, it is important that a real estate owner obtain the advice of a tax advisor before pursuing a donation of property because of differing tax consequences. In addition, an owner should consult with his or her legal advisors to discuss the legal risks and implications of donating real estate to charity.
Even though donating real estate to charity is not an effortless process, it can have beneficial results and should be considered as an option to minimize the tax consequences of disposing of real property.
Bremer is a real estate and land use attorney at Miller Nash LLP in Vancouver. She can be reached at leanne.bremer@millernash.com or 360.699.4771.
Gifford is a business, tax and real estate attorney at Miller Nash LLP in Portland. She can be reached at jenee.gifford@millernash.com or 503.224.5858.