Planned Giving

Your act of generosity, our longevity

With planned giving, you can provide long-lasting support for Boys & Girls Clubs of South Puget Sound while enjoying financial benefits for yourself.

Text Resize
Print
Email
Subsribe to RSS Feed

Wednesday July 18, 2018

Case of the Week

Exit Strategies for Real Estate Investors, Part 8

Case:

Karl Hendricks was a man with the golden touch. Throughout his life, it seemed every investment idea that he touched turned to gold. By far, Karl was most successful with real estate investments. It was definitely his passion.

Amazingly, Karl continued to buy and sell real estate at the age of 85. For instance, about three months ago, Karl discovered a great investment property. It was a "fixer-upper" commercial building in a great area. While other nearby buildings sold for over $2 million, the seller needed to sell quickly and was asking just $1 million.

The condition of the building turned many buyers away. It was being sold "as-is," but Karl was not deterred. He could see great potential with the building and knew it would not take much to get it to market condition. Therefore, Karl swooped in, bought the building for $1 million and instantly hired contractors to refurbish the place.

After three months of hard work refurbishing the building, the place looked like new! In the end, Karl invested $250,000 in the building bringing his total investment in the property to $1.25 million. One month after the completion of the work, Karl was contacted informally by a company that expressed an interest in the building - a $2 million interest! This was no surprise to Karl. He knew the building was another great buy.

After Karl learned about the benefits of a FLIP CRUT, he eagerly wanted to move forward. It looked like the perfect solution. (See Part 1 for this discussion.) However, there was still one question in Karl's mind.

Question:

Karl took depreciation on the building for several months. Although the amount of depreciation was not significant, Karl wondered, "What are the tax consequences when transferring depreciated property into a FLIP CRUT?"

Solution:

It is not uncommon for a donor to own real estate that he or she has depreciated (e.g., rental or commercial property). As a result, there may be some depreciation-related capital gain issues or depreciation recapture issues.

If a donor has taken accelerated depreciation, the depreciation recapture rules require a donor to realize ordinary income upon sale of the depreciated property in an amount equal to the excess of accelerated depreciation over straight-line depreciation. See Sec. 1250. So, if Karl elects to sell the property himself, some of the gain would be recaptured as ordinary income.

For gift planning purposes, any gift of accelerated depreciation property will be subject to the income tax reduction rules. See Sec. 170(e). Basically, the initial fair market value charitable deduction will be reduced by the ordinary income recapture component. In this case, Karl did not take any accelerated depreciation, so the depreciation recapture rules will not affect his FLIP CRUT charitable deduction.

Although Karl did not depreciate his property on an accelerated schedule, he did depreciate the building on a straight-line basis. As a general rule, if a donor has long-term capital gain attributable to straight-line depreciation, it is subject to a higher capital gain tax rate of 25% instead of 15% or 20%. This 25% tax rate is not as beneficial as the lower tax rates. However, it is better than the higher ordinary income tax rates. Also, unlike accelerated depreciation, the transfer of property subject to straight-line depreciation does not reduce a donor's charitable deduction if the depreciation-type gain is long term.

With respect to charitable gifts, a gift of depreciated property to a FLIP CRUT will not trigger any income tax to Karl. Instead, the trustee will take Karl's cost basis and properly account for the tax characteristics of the property when sold using the four-tier accounting rules. As a result, Karl may receive some depreciation-type gain as unitrust payouts in the future (depending on the trust investments and performance).

In this case, Karl's depreciation gain attributed to straight-line depreciation is short term because he held the property for less than 12 months. Unfortunately, Karl will not enjoy the benefits of the 25% tax rate but instead will realize short-term capital gain income at his ordinary income tax rate. Moreover, Karl's charitable deduction is subject to the reduction rules under Sec. 170(e). This is true because of the short-term capital gain nature of the property. (See Part 2 for a discussion of the reduction rules.)

In the end, the depreciation issue does not play a significant factor in the outcome and benefits of Karl's FLIP CRUT. Proudly, Karl moves forward to a successful financial and charitable conclusion. He funds the FLIP CRUT and enjoys capital gains savings, a lifetime income stream and an $825,000 income tax deduction.

Published April 6, 2018
Print
Email
Subsribe to RSS Feed

Previous Articles

Exit Strategies for Real Estate Investors, Part 7

Exit Strategies for Real Estate Investors, Part 6

Exit Strategies for Real Estate Investors, Part 5

Exit Strategies for Real Estate Investors, Part 4

Exit Strategies for Real Estate Investors, Part 3

scriptsknown

Gift Options

Donor Stories

Learn how others have made an impact through their acts of giving to our organization and others. Explore the many benefits of charitable gift planning.

more

How to Give

Learn how to make a gift that provides tax benefits and even life income.

more

What to Give

Find out what type of assets make the best planned gifts. Learn about gifts of cash, securities and property.

more

Planned Gifts Calculator

View a presentation that shows the benefits of a planned gift based on your property and goals.

more

News

Personal Planner

Bequests to Your Favorite Charity Bequests to charity are the most popular type of planned gift. A donor may retain assets during life and then leave a...

more

Finance News

Hewlett-Packard Continues Resurgence Treasuries Rise on Mixed Economic Data Interest Rates Stay Low

Savvy Living

Personal Tech Products Designed Specifically for Seniors. Can you recommend any tablets, smartphones or computers that are specifically designed for seniors? I would like to buy...

more

Washington News

IRS End-of-Year Tax Tips

In IR-2014-110, the IRS offered tax tips for end-of-year charitable giving. 1. Household or Clothing Gifts ? These items must be in good used condition or better..

more

For Advisor

Advisor Resources

We have a complete tax update service for CPAs, attorneys, CLUs, CFPs, ChFCs, trust officers and other professional friends.

more

Deduction Calculator

The GiftLaw Calculator is a planned gifts calculator for professionals that follows the IRS format

more

Private Letter Ruling

Estate Distributes to Foundation without Self-Dealing

Decedent formed Company and subsequently formed Irrevocable Trust...

more

Washington News

IRS End-of-Year Tax Tips

In IR-2014-110, the IRS offered tax tips for end-of-year charitable giving. 1. Household or Clothing Gifts ? These items must be in good used condition or better.

more

GiftLaw Pro

Charitable Tax Reference

GiftLaw Pro is a complete charitable giving and tax information service inside the GiftLaw website...

more

Case of the Week

Living on the Edge, Part 4

Rhea Jones, 75, lives in a beautiful coastal town in northern California. Rhea?s home occupies three...

more

Article of the Month

Gifts of Pass-Through Business Interests

A charitable gift of a business interest can make a wonderful gift to charity. At the same time,...

more