By Guest Blogger Barry Williams, CPA, JD

Real estate, as well as other types of property, can be gifts that benefit either qualified charitable organizations or family and friends who may otherwise not be able to afford the property or acquire it for other reasons.

In making gifts of real estate, the formalities of the transfer must be followed just as they would be if there was a sale of real estate to another party. To make a gift of property to another person, the formalities of state law must be followed and three specific events must occur: the intent by the donor to make a gift must be present; the delivery of that gift to the intended donee need occur; and the acceptance of that gift by the donee must occur. The absence of any of these requirements voids the gift or renders it incomplete.

In making the decision to gift real estate, two factors will shape the ultimate tax effect of the transfer. They need to be considered early in the decision making process. First, who will be the donee (recipient) of the gift: a charitable institution or noncharitable donee, such as a family member? The characterization of the donee will determine which areas of the tax law will govern the transfer. With a transfer to a charitable organization, the donor will be looking to avail themselves of an itemized deduction for the fair market value of the real estate as a charitable contribution on their individual income tax return. When transferring to a family member or other person, considerations will involve the applicability of the gift tax provisions based upon the fair market value of the real estate with the additional considerations of the donor’s tax basis in the asset and the holding period for the asset.

Fair market value is essentially the price at which a willing buyer and seller would exchange the property in an open market when neither is required to act. When contributions to a charitable donee exceed $5,000, as would be the case with most real estate transfers, the taxpayer must file Form 8283, Noncash Charitable Contributions, with his or her income tax return to claim the deduction. Completion of the form requires an appraisal that was made not more than 60 days prior to the date of the contribution of the property. In addition, the appraisal must be received prior to the due date of your tax return, including extensions. Failure to obtain a required appraisal within the mandatory period will result in a disallowance of the charitable deduction. The IRS provides guidance for donors and appraisers in determining the fair market value of property and when the fair market value can be used for the deduction in two publications: Publication 526, Charitable Contributions, and Publication 561, Determining the Value of Donated Property.

The second factor to be considered is whether there is any consideration being given to the donor of the property as a part of the exchange. Consideration is a broad concept that involves a benefit received, or expected to be received. Consideration is often monetary, but it can also be a promise to perform a specific act or to refrain from doing something. A transfer of known liabilities, such as mortgages, and unknown liabilities, such as liens, to the other party would be consideration given to the donor in the exchange.

If a benefit is received from a charitable organization, the amount of the tax deduction will be limited to the excess of the amount of the contribution over the value of the benefit received. A common example would be attending a charitable fund raising event where the price paid to attend exceeds the established cost of the event. When dealing with real estate, a “bargain sale” can occur when the amount received is less than the fair market value and there was intent to make a gift. In this situation there are two tax transactions, a charitable contribution and a sale or exchange of property. The donor will be required to report a gain on their tax return if the amount received exceeds the adjusted tax basis in the property. The charitable contribution deduction is also limited in such circumstances, and is calculated in a three-step process outlined in IRS Publication 526, Charitable Contributions.

When gifting real estate to a noncharitable recipient, such as a family member, the gift tax rules apply. Under these rules the donor is required to pay any gift tax liability, with limited exceptions. Gifts that are not greater than the annual exclusion amount for the tax year are exempt. For 2015 and 2016 the annual exclusion amount is $14,000 per donee, which is doubled if both spouses join in making the gift. To the extent that the noncharitable gift exceeds these amounts, the excess can be offset by the unified credit equivalent amount of $5,430,000 in 2015, and $5,450,000 in 2016.

In the case of a noncharitable gift of real estate, the fair market value rules apply in a similar manner as in a charitable contribution. The instructions for Form 709, United States Gift Tax Return, states that a donor filing the form must provide information showing how the fair market value was determined, including any appraisal used to determine the value. The donor provides the tax basis that will transfer to the donee on Form 709, and should also provide the donor’s holding period, which should be used by the donee should they transfer the real estate. Should the transfer of real estate include a benefit for the donor, such as the assumption of liabilities by the donee, the “bargain sale” rules will apply.

The transfer of real estate requires understanding a complex body of rules and regulations that must be followed to achieve the tax benefits and avoid the pitfalls. The Pennsylvania Institute of Certified Public Accountants can assist you in locating a CPA to help you successfully achieve your goals.

Barry Williams, CPA, JD, is dean of the McGowan School of Business at King’s College, Wilkes-Barre, Pa. Williams holds a JD from Widener University, a master’s degree in taxation from Villanova University, and an MBA from Wilkes College. He serves as a member of PICPA’s CPA Image Enhancement and Relations with Schools and Colleges committees.