Give Property Before It’s Too Late to Avoid Tax on Capital Gain

Posted July 2016

Sometimes a person approaches a charity with an inquiry like this: “I am in the process of selling some highly appreciated commercial real estate, and my accountant has advised me that I will have to pay a significant amount of tax on the capital gain. The transaction is now in escrow, but the sale has not closed. If I were to contribute the property to your organization before the closing, can I avoid paying the tax?”

The answer, unfortunately, is “no.” If property that is subject to a binding purchase-and-sale agreement is contributed to a charity, the donor will receive a charitable deduction but will be taxed on the gain. To avoid paying tax on the gain, the owner should transfer the property free of any sales agreement and have the charity take responsibility for selling it. Any information the owner may have about interested buyers may be conveyed to the charity.

Depending on the property and any encumbrances that may be attached to it, here are three ways to avoid some or all of the tax on the gain.

  • The owner makes an outright gift of the property, avoiding all tax on the gain and receiving a charitable deduction for the appraised value.
  • The owner gives the charity an undivided fractional interest in the property and avoids some of the tax on the gain while receiving a charitable deduction. For example, the owner gives a 30 percent fractional interest and receives 70 percent of the sales proceeds, generates a charitable deduction for the appraised value of the 30 percent interest, and avoids tax on 30 percent of the gain.
  • The owner transfers the property to a charitable remainder unitrust, which pays the owner and/or another person income for life or a term of years. Usually, the trust would be structured to pay net income from the property prior to the sale and then a percentage of trust assets. The capital gain would be taxed neither to the owner upon the transfer nor to the trust upon the sale. The trust payments would probably be partly ordinary income and partly capital gain.

If you are thinking about selling property and are concerned about tax on the gain, please contact us about your options prior to any sales agreement.

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