Generally, as mentioned in a previous post, donors of the “use of property” to a charity do NOT receive a charitable deduction (under the partial interest rule), similar to donations of an individual’s time and other services.
What I discovered on behalf of a pro-bono client last week was that there is a simple, legitimate approach that may net some IMPROVED tax benefits to a property owner providing long term space usage to a nonprofit (improved is bold for good reason!).
Here is the “gift plan” we discovered:
Donor/property owner executes a triple-net lease for $1 a year with the charity using the space as the tenant. A triple-net lease is one which the tenant is required to pay all expenses and even real estate taxes on the property (or prorated portion related to the percentage of use of the property).
Previously, the donor/property owner was paying for the taxes and upkeep out of his own pocket (or out of the pocket of his legal entity that technically owns the property).
Now, the donor/property owner is free to make tax-deductible contributions that can assist the charity in paying those expenses.
Note, the donor/property owner should have been getting some tax benefits previously for paying real estate tax and even upkeep expenses. Once the triple-net lease is signed, the donor/property owner no longer gets those benefits (interestingly, on the real estate tax, the property owner (or his LLC) now gets hit with income for the charity paying his tax obligation but still gets to offset that income with the standard real estate tax break).
My initial thought was that the donor was just trading in one set of tax benefits (real estate and business expense deductions) for the charitable deduction – and maybe it wasn’t worth the headaches.
But, I discussed this with the donor and he insisted that he preferred this approach since he said that he saw no real benefit from the tax breaks he had been getting for paying the taxes and upkeep on the property in an LLC (I wonder if that is true but he was fully informed and has his own counsel).
Note: some might question this as a “step transaction.” That is the code word for doing something indirectly that you couldn’t do directly. I ran this by 3 very good attorneys (in addition to myself). This gift plan is NOT about getting a charitable deduction for letting a charity use property where you normally can not (that would be a step transaction). This gift plan is about structuring the use of property by a nonprofit that MAY give the donor some preferable tax benefits. Donor gets some benefits but loses others.
Anyway, the donor is free to give more or less to the charity.
Not being an accountant, I am not sure of the real benefits of the tax breaks for paying real estate or upkeep by an LLC (that is probably losing money or breaking even). Assuming this donor fully understood the tax benefits all around and he preferred the charitable deduction (which was his personally not to his LLC), I have to assume that there is something here.
As always, this is a complex transaction and I caution any fundraiser in particular in even discussing this with donors. Absolutely required, the donor’s accountant and legal counsel need to review the entire transaction. The fundraiser’s job is to introduce the idea so that the donor’s counsel can flesh it out.
That being said, it is a nice option for a “donation” of the use of property that has not been discussed really anywhere (except for a short PGDC article that was not complete in its analysis). If it helps the donor, let’s hope that the donor will feel good about giving even more!