Real Estate Donation: A Creative Way to Give and Get Help

Two real estate problems were disturbing Dovid Wohlhendler’s Purim preparations. Dovid had become the reluctant long-distance owner of a small house in Indiana after someone defaulted on a $50,000 loan. While the house was now worth $100,000, maintaining it from afar was a big headache. It seemed his only viable option was to sell it, dropping its price to $75,000 to enable a quick sale.

Dovid was also on the board of an out of town yeshivah that was pursuing the purchase of a building vital to its growth. The problem, of course, was money. The most the yeshivah could afford to carry was $4 million, but the building was appraised at $6 million. Dovid knew there was no way the building’s owner would walk away from that much money, even for a good cause.

Was there anything creative he could do to solve his real estate dilemmas?

Money-Smart and a Mitzvah

Wondering what to do with a house may sound a bit loopy to those who are feeling the current real estate boom; if Dovid’s property were in Lakewood or another hot market, it would surely sell quickly for top dollar and with little fuss. But it’s a big world out there, and I’ve seen many scenarios where a real estate donation could be a real win. Assuming someone is in a high tax bracket, handing over a property to charity can be a wise financial decision in addition to the obvious ruchniyus benefits of giving tzedakah. And savvy charities can use real estate donations to help make “deals” happen.

Tax Saved is Money Earned

If Dovid is in the highest tax bracket, donating a property appraised at $100,000 can bring him a tax deduction worth $45,000 or more, especially if he pays taxes in a state like New York that allows for these charitable tax deductions. Now, that’s obviously a lot less than the $75,000 Dovid thinks he can sell quickly for. But Dovid wouldn’t net the entire $75,000 after subtracting brokerage fees, closing costs, and capital gains tax. There would also still be carrying costs and other headaches, even during an abbreviated sale process.

And Quickly Too…

Say the actual sum Dovid would net with a discounted sale is $60,000. Compare that to a real estate donation in which he offers the property to the closest kollel, yeshivah, or shul on the condition that they close right away and cover all closing costs. Being local gives the charity more options versus when the donor is a far away, and for them it’s hakol revach whether they decide to keep the house or sell it. Dovid can swiftly and painlessly pocket a big ticket mitzvah plus a deduction worth $45,000, which may be attractive versus retaining his distant headaches to pursue $60,000.

Simple—But Ask

The real estate donation transaction is straightforward. Dovid simply signs over the deed to the house, though the charity may choose to protect itself with a quick title search and basic property due diligence first. The charity then provides the donor with a written receipt and Tax Form 8283, which is required by the IRS for all non-cash donations. This brief form is also signed by a licensed appraiser, who certifies the property’s valuation to prove that the donor’s deduction is based on real numbers. Speak to a tax professional before doing this live, but real estate donation is simple when the donor and donee are on the same page.

Bargain Sale Twist

Dovid may also be able to pull off more substantial real estate donation magic for the yeshivah. Through something called a charitable bargain sale, Dovid can significantly minimize the gap between the value of the property the yeshivah has its eye on and the amount it can afford. Bargain sale rules say that if the owner agrees to sell a building to a charity for the bargain price of $4 million, i.e., $2 million beneath appraised value, he can claim the sum of that discount as a charitable donation.

A $2 million charity tax deduction can be worth $1 million or more to some wealthy sellers. A bargain sale contract will clarify that the sale price is $6 million with $4 million of that coming in cash and the balance being donated by the building’s owner. The yeshivah can also guarantee a quick, cost-free closing (excepting any costs required by law). That package of savings from taxes and closing costs and the avoidance of carry costs during a lengthy sale process can narrow the spread from sale at full appraised value versus a bargain sale donation to just $600,000.

With the value of the tax deduction doing most of the work, Dovid may be able to swing this. Assuming the owner can use the tax deduction, he definitely won’t be missing out on $2 million with a bargain sale. And even though the building was appraised at $6 million, it doesn’t mean that’s what the market will actually pay. If the strongest regular purchase offer that comes in is 10% below appraisal—a $600,000 discount—the donor would not even come out ahead financially by selling versus donating! Dovid can credibly make the pitch that the owner can easily do a massive mitzvah at potentially no cost.

Tread Carefully, Though

Admittedly, I’m pushing a bit here. Selling will almost always be a better option from a purely numerical perspective. Not everyone, even among the very wealthy, requires such a large charitable deduction, nor is every charity equipped to accept charitable donations of property. There’s also undeniably a raised chance of an IRS audit when someone claims a large non-cash donation. Indeed, the IRS requires charities to notify it of any sale of a donated asset within three years. If that resale price is substantially beneath the donation’s claimed appraised value, all parties may be put on the hot seat to explain why.

Happy Times are Coming

I’ll stress again that real estate donations require professional review. But the strategic opportunity offered by this structure is real and is utilized by savvy donors and charities to bring about creative win-wins. Imagine if Dovid can quickly remove a property management headache, support a kollel, get a yeshivah its building, and be mezakeh a donor—through a bunch of phone calls. Sounds like a recipe for real simchas Purim to me!

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