Five Things to Know Before You Accept A Gift of Real Estate
Real estate can be a very complex asset to accept. That’s because no two properties are alike. They all have their own intricacies, such as location, condition, use, value, etc. These intricacies all bring their own kind of potential risk to a nonprofit. Luckily, the process for evaluating real estate is the same – no matter the kind of property you’re dealing with.
The most important part of evaluating a gift of real estate is knowing what information to collect. In my new book, Turning Wealth Into What Matters, I outline all the information you should collect. In fact, I include a questionnaire you can give to a donor to complete.
In this article, we will walk through the top 5 things to know about a property before you accept it.
Item 1: Title
Title is important for two reasons. First, you want to know how the property is titled. That refers to who owns the property. Is it owned by a married couple, a business, or a trust? It’s always a good idea to know whois making the gift.
Second, it’s essential that the title is “clean”. That means there are no encumbrances that would preclude ownership from being transferred to your organization OR preclude your from selling the property to a buyer. Encumbrances are things like delinquent taxes, mechanic’s liens, pending litigation, deceased persons still on the title (I’ve seen this one several times.). Some encumbrances are easy to fix. Some take years and a lot of money to resolve. The best way to find out the current state of the title is to order a “title commitment” from a title company.
Item 2: Current and Previous Uses of the Property
It’s vital for you to know how the property is being used now and how it was used in the past. If the property has been used for something that could cause environmental contamination you want to know about it. Even if happened many years ago, the contamination could still be lingering on the property and you could be responsible for clean-up costs.
The current use will also affect how easily it will be to sell the property. If there is a tenant renting the property, that could decrease the number of people who want to purchase it. If it is a commercial property (such as a warehouse or office building) the timeline for the gift process is going to be a bit longer. Commercial properties are more complex and require more intricate due diligence on the part of the charity. There will be more details to consider for a commercial property.
Item 3: Mortgaged Property
What if a donor proposes a gift of real estate, but it has a mortgage on it? It may not be the best asset for that donor to give, because of the Bargain Sale rules. That rule requires a donor to recognize income in the amount of the outstanding loan if she donates a mortgaged property to charity. Furthermore, the lender would likely have to agree to the gift and that may not be an easy thing to arrange. If the lender did agree, your organization would most likely be required to assume the mortgage and be obligated to pay the outstanding debt.
If the donor really wants to donate this property, there are a couple options she can consider. First, she could pay off the mortgage with other assets prior to making the gift. Second, she could transfer the mortgage to a different property. Either way, the property in question should be debt-free before it is given to charity.
Item 4: Carrying Costs
You’ll want to know how much it’s going to cost you to own the property. Even if you plan to sell the property soon after the gift is made – there will still be costs of ownership. You’ll be responsible for property taxes, maintenance, utilities, insurance, etc.
Item 5: Value
It is essential that you determine a minimum value for each type of non-cash gift, especially real estate. Gifts of real estate require considerable time, attention, and expertise. Therefore, you want to make sure that the value of the property is worth the resources you will expend to evaluate, accept, manage, and/or liquidate it. It is a very good practice to list this minimum value in your gift acceptance policies and be sure those policies are reviewed regularly – at least every 3 years.
How do you assess the value without an appraisal? The tax-assessed value is often a good way to determine relative value. You could also engage a real estate broker to give you an estimated sale price. Many times, they will do that for little to no cost.
You may want to establish different minimums for different types of property, such as residential, commercial, farm, and vacant land. Residential property is often less complicated to deal with than commercial. Therefore, your minimum for residential property could be much less than that of commercial property.
Do you want to accept real estate, but are unsure of how to go about it? Well, worry no more! Check out my new book, Turning Wealth Into What Matters. It will provide you with:
- Fundamental knowledge of virtually every asset type.
- A step-by-step process you can use with virtually every non-cash gift.
- Proven internal procedures you can begin using right away.
- Detailed intake checklists so you can be sure to collect all the right information.
 26 CFR § 1.1011-2 (a)(3)Subscribe to Gift Tips