Another gift planning quandry: real estate, the 3 year rule and donor control

As my friends in the planned giving world are finding out, the cost of sharing your "war stories" with me to see a post about your story. This one reminds us about the current post-gift reporting rules but more importantly, finding out the "donor's" real intentions and whether there really is a "gift" here.

This story involves an offer of vacant land where the potential donor says he already has an appraisal for over $500,000. This is a straight gift (no retained income or retained life estate or split interest). Sounds good barring any unforeseen environmental or title issues (not the subject of this post because we are still far away from those issues on this one).

What's the catch?

The "donor" (mind you, this "donor" has actually never given anything to this organization but does profess some admiration) told the development officer that he wants some sort of guarantee that the charity will not undersell the property. In fact, this was why he came to this organization (a message that he will go to another if need be). In my mind, new donors generally don't make first time gifts for $500,000 or more - so this is the catch.

Rule number 1: donor wants a deduction, donor needs to give up control of the property.

My first question is: why does he want a guarantee?

We only speculated but our thoughts turned to the post-gift reporting requirements. For a gift like this (real estate over $5,000), the donor will need a qualified appraisal (a subject for future posts) and the charity will have to sign form 8283 acknowledging receipt of the property and the appraised value.

What is the charity's responsibility when it sells the gifted property? If it is sold within 3 years (yes, 3 years not 2 years - extended in the Pension Protection Act of 06), here is the rule (as quoted directly from "Planned Giving Answers Online" a plug for my friends at EDS):

"Charitable organizations must file Form 8282 (the so-called "tattletale" form) to report to the IRS any sale or other disposition of donated property (other than publicly traded securities) within three years after the contribution if the property was valued at $5,000 or more. When required, Form 8282 must be filed with the IRS within 125 days of the disposition, and there are penalties on charities who fail to comply (up to an annual maximum of $250,000). Charities also must provide a copy of Form 8282 to donors, and additional penalties apply to charities who fail to do so."

Maybe this donor is concerned about his deduction being questioned?

At this point in the conversation, I started getting confused with the special rule for tangible property sold within in 3 years of a gift (an automatic loss of related use and retroactive deduction reduced to cost basis - see http://plannedgift.blogspot.com/2009/07/art-and-other-tangible-property-gifts.html).

Chalk it up to end of day sugar lows. This morning, I scoured my sources and confirmed that real estate gifts do not require "related use" and a sale within 3 years only means that form 8282 has to be filed by the charity - a possible red flag with extreme discrepancies in the valuation verses the actual sale price.

Lastly, we did the obvious and most easily overlooked step: we googled the "donor" and found that he was in the business of real estate. Makes me think he might just have a business motive to see that the property doesn't sell for too low - maybe he's involved in developing the land and doesn't want to see his "gift" undercut the value of the other vacant lots in the area.

At this point, my advice was to get some local volunteers (in the real estate business in the area of the property) to scout the property, do some independent research, and give an informal report as to its marketability.

In the meantime, I would want to meet this donor face to face to get a better feel for the donor. If he really wants to benefit organization, he will have to understand that the charity has to play by the rules (and no legal guarantees of the sale price can be made in writing or otherwise). Business reasons for not seeing the property sell too low can be addressed with split interests or CRTs or other creative arrangements but intent on taking an excessive deduction from a compliant charity is probably not fixable. If the informal real estate committee comes back with a resounding report that the property is worth taking and its likely sale price range makes sense, maybe this goes to the next level (environmental, qualified appraisal, title, etc.).

Stay tuned for part II!