Donating real estate to a donor-advised fund (DAF) can be a great way for business owners to reduce their tax liability and increase their charitable giving.
What is a Donor-Advised Fund (DAF)?
A donor-advised fund (DAF) is a charitable vehicle that allows donors to make a contribution to the fund, take an immediate tax deduction, and then recommend grants to their favorite charitable organizations over time. Think of a DAF as your own private foundation or a charitable giving savings account managed by a public charity. As the donor, you get to advise the DAF’s sponsoring organization on when to grant assets.
But remember: DAF contributions are irrevocable. A donor cannot change their mind and later reclaim the donated cash, stocks, bonds, real estate, or other assets.
Why donate real estate to a DAF?
When it comes to real estate, DAFs can be a tax-efficient way of giving. They not only allow a business owner to avoid the time, cost, and complexity of selling a property, but they also allow the donor to take an immediate tax deduction. The tax deduction will be for the full fair market value of the property rather than just the original purchase price. This can be especially beneficial if the property has appreciated significantly in value since it was purchased.
Additionally, since the DAF holds the property, the business owner avoids any capital gains taxes they would have had to pay if they had sold the property instead. It also makes for a larger charitable donation than if the business owner had sold the property and then donated the sale proceeds to the charity without a DAF – the business owner both avoids capital gains taxes and can take a tax deduction.
Moreover, DAFs also provide the opportunity to sell the donated property and convert it into liquid assets, which can be directed to various charitable causes. This approach allows the business owner to make a larger gift and use the proceeds from the sale of the property to support multiple causes over time.
When business owners donate real estate to a DAF, they should get it appraised by a qualified professional to ensure fair market value is assigned and the business owner gets the appropriate tax deduction. Additionally, it’s important to work with a knowledgeable professional who has experience in handling such gifts, as there can be some complexities in the process, such as property title transfers, compliance with state and federal regulations, and dealing with any liens or encumbrances on the property.
If you are thinking of contributing real estate to charity through a DAF, make sure the property is marketable and relatively easy to liquidate.
Additionally, ensure the property is debt free. Any debt on the property could complicate the donation; the IRS bargain sale rule may come into play, generate some capital gains tax, and lower the value of your donation.
Similarly, avoid a prearranged sale of the property before contributing your real estate to a DAF. If the IRS deems it a prearranged sale, this can also complicate the donation and generate capital gains tax requirements.
Interested in Learning More?
Our team is ready to support and advise you through your DAF charitable contributions, including real estate. Contact our team today.
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