Yesterday’s question of the day: donor is letting charity use space rent free. Can he take a charitable deduction?
Answer: no. Partial interest rule problems here. Generally, unless you give an undivided ownership interest in something, you aren’t entitled to a deduction. Some exceptions to this rule but not here.
Of course, the nonprofit has a reliable source saying it is possible so they put me in touch.
Here is what we discussed. What if the donor puts the property or a percentage of it (or shares of LLC) into a charitable lead trust (see prior posts on lead trusts or https://theplannedgivingblog.files.wordpress.com/2011/03/understanding-charitable-lead-trusts.pdf for more info on these). Let’s say it is a Grantor version, meaning that the property interest reverts back to the donor at the end of the term. Assume the payout to the nonprofit from the lead trust is the same as the value of the rent the charity isn’t paying. On paper, lead trust pays the charity the amount they should be paying in rent – sounds like a wash.
What’s wrong with this scenario? (putting aside the fact that I don’t even know how it is owned or anything about it so the discussion could be a nonstarter anyway)
Well, the donor could take as a charitable deduction the present value of the payment stream to the charity – there is your deduction! Mission accomplished? No.
What I told this reliable source is that this is a Grantor trust. That means that the Grantor owns it, pays taxes on it (and there is no offsetting of the trust’s income from the lead trust payments to charity because the donor takes credit upfront for those charitable payments).
In more simple terms, what this Grantor trust will do is create is phantom taxable income to the donor for the value of the phantom rent payments from the charity.
So, the trade off would be: donor gets upfront deduction but has to pay tax in rest of the years of the trust on rental income (that he isn’t seeing).
I don’t think the donor want’s his tax deduction so badly that he’s willing to pay income tax on the “rent” payments that he isn’t receiving from the charity.
We’ll see about this one. There are about 1 million and 1 reasons why this will never happen but maybe it will lead to a more sane gift proposal like a percentage interest in the property! That is a deductible gift that will not cause phantom income and in fact, could lower the donor’s annual tax bills by the assignment of a percentage of income to the charity (which by the way he doesn’t actually has send as cash since charity’s payment is the free rent!).