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 http://plannedgivingadvisors.com/wp-content/uploads/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!).
The tax code wants no part of a donor taking a charitable deduction benefit for a “gift” of use of real estate.
Knowing that the lead trust idea is way out there, I tried concocting a plan whereby the donor will actually lease the property to the charity for $1 a year using a Triple Net Lease (obligation to pay real estate tax falls on charity then). The idea is that the donor could make tax deductible gifts each year that would help out the charity in paying the property expenses and maybe it would be a better tax consequence for the donor than just paying the expenses himself.
But, I realized that the donor now paying real estate tax and other upkeep expenses gets tax deductions for those expenses. He loses those deductions if he has the charity paying all the expenses under a Triple Net Lease. So, he would essentially be exchanging real estate tax and upkeep expense deductions for a charitable deduction – and probably end up in the same place as before (but possibly facing IRS questions about this potential Step-Transaction).
Outside of a donation of an undivided interest in the property, these other ideas just don’t make sense. And, even the undivided interest has its problems.
Oh well.
Final follow-up: turns out that the donor, for whatever reason, received no tax benefit for paying taxes and expenses on the property that the charity was using for free. So, by signing a triple-net lease with the charity and subsequently making contributions that go to the charity, the donor actually benefits.
I still don’t understand why the donor didn’t get any tax benefits from the taxes and expenses his business was paying (I am not an accountant). But, if that is the case, I am really pleased that this gift scenario works!
The donor comes out much better than before and we basically invented a new giving technique.
You are so awesome! I do not suppose I’ve truly read through a single thing like this before. So wonderful to find somebody with a few genuine thoughts on this issue. Seriously.. thanks for starting this up. This web site is something that is needed on the web, someone with some originality!
Partial interest rule problems here! Generally, unless you give an undivided ownership interest in something, you aren’t entitled to a deduction. therefore the answer is NO!
it’s difficult to find well-informed people for this subject, however, you sound like you know what you’re talking about! Thanks
Sorry about not replying earlier. I have to get into the partial interests rule to understand it better and see where it causes trouble here. This idea is really way out there anyway – I would probably advice a client to avoid being the first kid on the block to try it!
Great discussion, creativity, expertise and analysis.
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Thanks! The site is run by wordpress.com – a pretty big operation so it is surprising to hear.
Anyway, I just dealt with a similar issue for my mom yesterday. Her computer was on the “fritz”, or so she thought. Was ready to buy a new one but Windows 8 is a nightmare. I opened it up, and figured out her problem….. She was using Internet Explorer! My advice: use Google Chrome (or Safari or Firefox) but never, ever use Internet Explorer! I am serious. You should hide the icon, write yourself a note, whatever it takes to get out of using that horrific, computer killing browser. All joking aside, don’t use IE.
Jonathan