Rent Property to Charity and Win …
Even when there's no income involved.
July 2006 By Kathleen A. Stephenson and Lisa B. Petkun
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A donor owns property that he rents to third parties — property that a charitable organization could use to house its offices or one of its programs. The donor would like to benefit a charity and claim a federal income- and gift-tax deduction for the donation but doesn’t want to part with the property. What options are available?
From a charity’s point of view, being able to use property provides a significant benefit, even if the charity doesn’t become the owner. One option that benefits both parties is the rent-free lease. Such an arrangement won’t provide all the tax benefits an outright donation would,
but it’s not without advantages.
The Internal Revenue Code won’t allow a donor to deduct the value of fair
market rent not charged a charitable donee. The donor would be claiming a deduction for income he didn’t receive. Rather, the advantage to the donor is that the rent that otherwise would be included in gross income for federal income tax purposes isn’t received and, as a result, not taxed.
If the donor would rent the property to a tenant and then donate the rental income to charity, the donor would be required to include the rent in income and then claim a charitable deduction. By allowing the charity to use the property rent free, the donor would achieve the result without the necessity of including the rent in income and claiming an income tax deduction for the charitable contribution. Thus, the federal income tax result of such a transaction is straightforward: No income is received, and no income is taxed.
Things to consider
There are, however, federal gift- and estate-tax issues that need to be considered in such a transaction. First, to qualify for a charitable deduction for federal gift- and estate-tax purposes, the donor must convey the entire interest in the property. The only exceptions are charitable split-interest trusts such as a charitable lead trust or charitable remainder trust. These concepts that provide for a charitable and non-charitable interest in an asset have many technical requirements and have been discussed in earlier columns. Giving the right to use property isn’t a transfer of the entire interest in an asset, and therefore the gift of that right will be a taxable transfer for federal gift- and estate-tax purposes.
From a charity’s point of view, being able to use property provides a significant benefit, even if the charity doesn’t become the owner. One option that benefits both parties is the rent-free lease. Such an arrangement won’t provide all the tax benefits an outright donation would,
but it’s not without advantages.
The Internal Revenue Code won’t allow a donor to deduct the value of fair
market rent not charged a charitable donee. The donor would be claiming a deduction for income he didn’t receive. Rather, the advantage to the donor is that the rent that otherwise would be included in gross income for federal income tax purposes isn’t received and, as a result, not taxed.
If the donor would rent the property to a tenant and then donate the rental income to charity, the donor would be required to include the rent in income and then claim a charitable deduction. By allowing the charity to use the property rent free, the donor would achieve the result without the necessity of including the rent in income and claiming an income tax deduction for the charitable contribution. Thus, the federal income tax result of such a transaction is straightforward: No income is received, and no income is taxed.
Things to consider
There are, however, federal gift- and estate-tax issues that need to be considered in such a transaction. First, to qualify for a charitable deduction for federal gift- and estate-tax purposes, the donor must convey the entire interest in the property. The only exceptions are charitable split-interest trusts such as a charitable lead trust or charitable remainder trust. These concepts that provide for a charitable and non-charitable interest in an asset have many technical requirements and have been discussed in earlier columns. Giving the right to use property isn’t a transfer of the entire interest in an asset, and therefore the gift of that right will be a taxable transfer for federal gift- and estate-tax purposes.
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