I mentioned I was able to participate in a meeting with about a dozen fairly high-end charitable givers. Our host at the meeting told us about a giving strategy that he and his family have begun pursuing in the last few years, a strategy that can “pay back” in tax deductions as much as or even more than whatever you gave.

I thought it was well worth mentioning this strategy just in case you find yourself in a position to make donations of, say, a hundred thousand dollars or more and you’re not yet at the point where you are giving 50% of your AGI (Adjusted Gross Income) to charity.

This strategy could multiply your ability to give.

To set the stage, let me begin with a story from my experience.

Several years ago, one of the non-profit agencies with which Sarita and I are heavily involved needed new office space. They were completely crowded out of their current facilities.

As it happened, nine or ten of the agency’s larger donors were able to donate the funds necessary for the agency to acquire a new building.

Wonderful.

Then I attended the meeting a couple of weeks ago.

Based on what I heard there, and the research I have done since, I believe all of us could have done a lot better.

What did our host two weeks ago suggest?

He said that a certain nonprofit organization approached their family foundation to ask if they would consider buying them a new headquarters building. The family company, a nationwide retailer, does enough buying of real estate that it has people on staff who specialize in scouting out and buying commercial properties.

So they asked their real estate people to look for a suitable building to meet the particular non-profit organization’s needs.

They found a 500,000 sq ft office building with parking garage and 82 acres of property in the Chicago area. They could buy it for $2 million. It had been built 8 years earlier at a cost of $57 million.

They bought the property, then held it for a year while renting it to the non-profit for $1 a year.

After the year was up, they had the property appraised, then gave it to the non-profit.

Yes, the property was first developed at a cost of $57 million. Yes, they had purchased it for $2 million. But a year later, it was appraised for close to $30 million.

Since the donors’ income taxes come in at close to 45% (state and federal combined), once they took the tax deduction on the appraised value of the property, their donation–that cost them $2 million–was worth 0.45 x $30 million = $13.5 million.

As a result of their tax deduction, they not only covered their out-of-pocket costs for the donation, but they “made” $11.5 million (in taxes they no longer had to pay) . . . all the result of a $2 million contribution!

Now, I’m not interested in making money from the contributions I make. But if I can pay $100,000 for an asset that a charitable organization I support needs; if I can make that asset available to the organization for a year or more at some nominal cost (like $1), and then, after the year is up, donate that asset at a (legitimate) appraised value two times or more what I paid for it (so that all–or even a large portion–of my expenses are covered by tax deductions) . . . why would I ever want to give any other way?

If I am mostly concerned to maximize my ability to make charitable contributions, then I can take the “extra”/”found” money and give that as well. (I didn’t give the gift in the first place to get a financial “reward.” Why wouldn’t I give all the “extra” to the charitable cause of my choice?) But even if I am motivated by the potential rewards, why wouldn’t I make as many of these kinds of gifts as possible?

As a matter of fact, I can think of a couple of reasons.

1. If the gift of property I’m contemplating giving is valued at over 30% of my AGI, I cannot claim anything more than 30% of my AGI as a tax-deductible gift–at least not in the year I give it. (I do have five years in which I can claim the tax deductions for my non-cash gift. But, again, every year my non-cash gifts hit 30% or more of my AGI, the overage will have to carry over to the next year. If I keep hitting 30% of AGI in these kinds of gifts, after five years, I will lose the tax deductibility. [My opinion: Oh, well! . . . ] But the point remains: If you’re going to acquire no additional advantage by giving in this “different” manner, then why go to the trouble? Just give the money and move on.)
    
2. If all of my giving, together, is 50% of more of my AGI, I will gain nothing by claiming the appraised value of the property. –So the same thoughts control as what I mentioned with respect to the 30% limitation: I might just as well give the property during the first year while “all” I can claim is the unappreciated price . . . or “simply” give the cash so the organization can buy its own building (or whatever the property may be that I had contemplated giving).

A few other comments:

• Back when Sarita and I joined with the other large donors to make it possible for the non-profit organization to buy its new headquarters, we, the donors, could have formed an LLC or some other legal entity to buy the building and acquire and pass on the tax-deductible benefits to us.

A few comments from my CPA when I ran this by him. (And please recognize that anything I say here–whether attributed to me or to others–is not to be taken as definitive. You need to talk with your own tax and legal advisors to be sure of what will–or will not–work in your circumstances.)

• Notice that this type of giving is a tool to maximize someone’s charitable deduction–i.e. to reach the 30% or the 50% deduction, not necessarily to maximize the dollar effect or true value to the charity.

Also,

• This type of giving can only be accomplished if a “qualified appraiser” can legitimately value the property higher after that year holding period.
   
• If someone wants to give as John and Sarita do [i.e., in which, while we seek to be wise about taxes, we seek most to maximize benefits to our donees],
  

  you will be limiting yourself (tax wise) by giving this way.

  For instance . . . if in your example $2.0 million was your 50% limit . . . but instead you bought the building and gave it to the charity . . . you would only be able to deduct $1.2 million of it because of the 30% limit. If, instead, you gave the $2.0 million in cash to the charity (assumed 50% charity) . . . you could deduct all of it. The charity would then go out and purchase the property themselves.

  So the real kicker is . . . if you are well below your giving limits (i.e. 30% or 50% of AGI), this strategy works great.

  If not . . . you should seriously consider other means for giving wisely and well.
   

• If you give assets held for a “short-term”–i.e. one year or less–then the deduction is limited to cost and not Fair Market Value (FMV). –The year and one day limitation is statutory.
   
• Not only must you hold the property for at least a year and a day, but if you give tangible personal property (something other than real estate), what you are giving has to be used by the charity in its exempt function for a period of at least two years. If tangible personal property is not used in the charity, then the deduction is limited to cost, not FMV. NOTE: There is no such limitation on real property (“real estate”). An organization can receive a donation of such property, immediately turn around and sell it, and you will still qualify for a deduction.
   
• Gifts of capital gain property (i.e., property that, if sold, would generate capital gain) to 50% charities (i.e. churches, schools, hospitals, private operating foundations, etc.) are limited to 30% of AGI.
   
• Gifts of real estate of the type described will not work if given to private foundations. They have to be given to 50% charities . . . since gifts of real estate to private foundations only qualify for deductions on their basis (i.e., purchase price). Publicly traded stock is an exception.
   
• Buying property with a mortgage will change the results and generally results in both a taxable gain and a charitable gift.

Despite all the caveats and exceptions, I still thought the idea was worth mentioning.

Oh. One last thought.

The people who mentioned this strategy noted that with changes in real estate appraisal laws recently, super-high differentials like they enjoyed on their first such property purchase-and-donation aren’t as likely as they may have been at one time. But still, “If you buy a Rembrandt for $1 at a garage sale, it is still a Rembrandt and worth a whole lot more than what you bought it for!”¹

If you are a person who is in a position to make the kind of gift I’ve described here, and if you’re in a position to take advantage of the benefits the U.S. tax code offers to charitable donors, I’m hoping this post might help you to do what you have on your mind to do.

Maybe the code can enable you to give more–much more–than you could have possibly imagined.

---

¹A minor note on the legitimacy of claiming a deduction for values far higher than the price you paid for a property.

Our CPA wrote: “I ran across this researching something else and thought you might be interested. About ‘bargain sales.’ “

While normally the price paid in an arm’s-length transaction is the best indication of fair market value, “bargain sales” may not accurately reflect the fair market value of the property sold. This occurred in the following circumstances. On day 1, taxpayers contracted to buy real estate for $150,000. On day 5, they contributed the purchase contract to a private charitable trust. Several months prior to these transactions, the property had been appraised for local tax assessment purposes at $268,350. Several months after these transactions, the trust sold the property for $375,000. The taxpayers claimed a charitable contribution deduction for the contribution based on a fair market value of the real estate of $262,500.

IRS asserted that the property’s fair market value was equal to the purchase price, i.e., $150,000. The Tax Court upheld the $262,500 valuation.

Since the property had been vacant for several years and was subject to heavy real estate taxes, the seller, a large national company, was willing to sell to the taxpayers at a price that didn’t accurately reflect the fair market value. The later sale by the trust for $375,000 was competent and significant evidence of value at the time the taxpayers contracted to buy because there was nothing to indicate that market conditions had improved during the six months. Even discounting the sales price for the generous financing terms allowed by the sellers left a value high enough to equal the $262,500 valuation on which the deduction was based. The local tax appraisal also supported the $262,500 valuation.

–Grossman, Joseph, (1973) TC Memo 1973-219, PH TCM ¶73219 , 32 CCH TCM 1013 (i)

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