Home > Support Ministries > Stewardship > Financial Manual

II. Accepting Cash Gifts

A. Donation Receipting/ IRS Regulations | B. ECC Receipt Form | C. Restricted and Designated Gifts | D. Christmas and Special Gifts to the Pastor | E. Memorial Funds | F. Stock as a Charitable Gift | G. Real Estate as a Charitable Gift | H. Tangible Personal Property, Partnerships and Royalties as Charitable Gifts

INDEX

G. Real Estate As A Charitable Gift

Information helpful for church trustees, governing board members

INTRODUCTION
There are many issues with which to be concerned when you consider accepting real estate as a charitable gift. This is a discussion of three of these issues.

• Section I discusses gifts of partial interest in real estate.
• Section II identifies and discusses the environmental risk associated with accepting real estate ownership, and some important steps necessary to protect the church's assets.
• Section III identifies Internal Revenue Service rules and forms affecting donor and donee of real property so the donor can receive a charitable income tax deduction.

IF YOUR CHARITY DECIDES TO ACCEPT A GIFT OF REAL ESTATE, it is important to arrange for liability insurance coverage and (if there are improvements on the property) for property damage insurance PRIOR TO the transfer of the real estate to the charity.

Section I - Gifts Of Partial Interest In Real Estate
While gifts of 100% of the value of real estate are welcome, often a donor may wish to give a partial interest, e.g. 60%,while retaining the remaining 40%. Thus when the land is sold the donor may have to pay tax on the capital gains on the retained 40% while avoiding the capital gains on the 60%. The donor also receives a charitable contribution deduction on the gift of the 60%. This charitable income tax deduction may partially or completely offset the tax on the capital gains.

The Office of Estate Planning Services will prepare without charge a computer calculation and a computer generated illustration of the donor's tax consequences of partial or 100% gifts of real estate to your ministry.

Section II - Environmental Costs Of Bargain Real Estate
Federal and State environmental laws are designed to repair environmental damage and collect the costs of doing so. The blame or responsibility for the damage has little or nothing to do with whether or not any owner can be assessed some or all of the costs for clean up. Any owner, past or present, can be required to pay up to the entire cost of cleanup. Thus what seems to be a 'bargain' gift can turn out to be very costly.

What is an environmental audit? Environmental damage comes in many forms, such as: lead based paint, asbestos, leaking underground storage tanks, chemical spills, improperly stored or applied chemicals. A church should conduct or commission an appropriate investigation, referred to as an environmental audit, into the history and current status of a particular piece of property to determine that no environmental damage is present. The attached 'Real Estate Environmental Questionnaire and Disclosure Statement' may be helpful to you in this process. The objective is to: Identify presence and extent of environmental contamination or hazardous materials from current or previous site activities; Determine the level of compliance with current standards or regulations; and Provide a general review of environmental risks associated with the site and its operations. (U.S. EPA Fact Sheet, July 1991)

The minimum environmental investigation which should be performed is a 'Phase I audit'. A Phase I audit should investigate the past and present uses of the property by examination of governmental agency records; interviews with owners, operators, tenants, neighbors; examination of the property and structures for signs of contamination, or structures and practices frequently associated with contamination. Soil and water sampling are not performed during a Phase I audit.

Who may perform environmental Phase I audits? If a church chooses to perform the initial investigation rather than hire a consultant, they need to keep in mind the stakes if the job is not done competently. An "innocent landowner's defense will not stand if environmental damage is found later and it is shown that a properly performed environmental audit would have disclosed the damage. Note: the "Real Estate Environmental Questionnaire and Disclosure Statement," referred to above is NOT a Phase I audit.

What does a Phase I audit involve? A Phase I audit should answer questions such as: Which agricultural chemicals, if any, have been stored and or applied to the property? Are there now or have there been any storage tanks on the site and what were the contents? Who are the previous owners and occupants of the site? What business activities have been conducted on site? Did any activity involve chemical storage or processing? Are any buildings of the vintage that environmental agencies assume that problem material such as lead paint and asbestos are present? Is the site, or a nearby parcel, on any governmental list of sites known or suspected to have environmental damage or the potential for damage? Did an examination of the entire site turn up signs of contamination or practices frequently linked to contamination such as: junk piles; signs of trash dumping; outside drum storage pads; stressed vegetation and foliage; unusual variations in vegetation and foliage; fill pipes, covers or pumps suggesting the existence of underground tanks? The findings, information sources, and conclusions should be well documented.

What should be done once the Phase I Environmental Audit is complete? All board members should be required to read the report and be thoroughly briefed on the significance of environmental issues. If the report indicates there is no indication of environmental damage or hazardous substances the decision can be considered on whatever other merits are appropriate. If the investigation/audit reveals potential problems, the safest course of action is to regretfully decline the gift. If the gift remains under consideration, it is advisable to hire experts to perform a Phase 11 or Phase III audit to learn the extent of problems, and remedies available. The studies should identify remedies which are acceptable to regulatory authorities.

Should the church accept the property if the cost to clean up is 'reasonable'? Beware! Be sure that the remedy under consideration is acceptable to federal, state, and/or local agencies having jurisdiction and will not create additional liability. Some problems do not have a generally recognized solution and another procedure may be required later by the authorities.

At present, removing contaminated material to a waste disposal site exposes the owner of the original site to financial responsibility for the clean-up of the landfill.

If environmental problems are present it is advisable for the charity to arrange to have the clean-up performed before accepting the property. If the church is willing to pay for the clean up to obtain the property, work with an attorney to structure the arrangements to prevent assuming unnecessary liability. Arrange for post clean-up by inspection authorities having jurisdiction.

Section III - Paperwork Requirements Of The Internal Revenue Service
Donations or bargain sales to churches are generally expected to result in tax deductions to the donor. The U.S. Internal Revenue Service has regulations and filing requirements which both the donor and donee must follow to avoid disallowance of the deduction. Failure to follow the regulations can also expose either or both parties to fines and financial penalties.

What must the donor do to qualify for a tax deduction for real property? The donor must obtain a valuation of real estate being donated by a qualified independent appraiser. The IRS regulations impose specific meanings on the terms timely, qualified, and independent. The donor must complete IRS Form 8283 - Noncash Charitable Contributions Part I and sign Part 11. (Copy of IRS Form 8283 attached.)

Qualified - The appraiser must hold himself out to the public as an appraiser. The appraiser must sign Part III of IRS Form 8283 - Noncash Charitable Contributions certifying under penalty of perjury that he/she is qualified as an appraiser of the type of property being valued under IRS regulation 1.1 7OA-1 3(c)(5). The appraiser must state his qualifications in the appraisal report furnished to the donor. Generally this means that the typical 'market analysis' by a real estate agent is inadequate to support a tax deduction.

Independent - The appraiser may not be the donor, the donee or a party to the transaction by which the donor acquired the property and must not be related to or an employee of those individuals or organizations. Also the appraiser may not perform a majority of his/her appraisals during the taxable year for the donor, donee or for any party to the transaction by which the donor acquired the donated property.

Timely - The appraisal must be performed not earlier than 60 days prior to the date the asset is transferred to the charity and the written appraisal report must be received by the donor no later than the due date of the tax return on which the deductions is first claimed.

What are the church's responsibilities associated with gifts of real property? The church must provide a receipt for the donation and report any disposition made within two years of receipt. Either an official authorized to sign the tax returns of the charity or a person specifically designated to sign, must sign IRS form 8283 acknowledging the charity's receipt of the gift. If the charity sells, exchanges or otherwise disposes of donated property within 2 years of receipt of the contribution must file IRS Form 8282 (Donee Information Return) with the IRS and provide a copy to the donor. (Copy of IRS Form 8282 attached.)

For further information, contact the Executive Director of Estate Planning Services, at 800-483-2177.

(All material is presented for educational purposes only, and represents our current understanding based on information received from our tax and legal advisors. It is meant to provide information about the various personal, tax and economic benefits which may result from different estate planning and planned giving ideas. Because situations differ, it is important for you to have an estate plan specifically designed to fulfill your objectives. Nothing in this material is intended as legal, tax or investment advice. Laws and procedures are constantly changing, are subject to differing interpretations and may vary from state to state. If you require legal, tax or investment advice, you should consult a competent attorney, tax or investment advisor. The forms currently in use must be obtained from your tax preparer.)