Gifts of Appreciated Property - Huntington County Community Foundation
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Gifts of Appreciated Property

Gifts of Appreciated Property

I. Definition.

A donor chooses to give property which is presently worth more than its original cost. This is called “appreciated property.”

The gift property must be held for more than 12 months or more to qualify as “long term” appreciated property.

The donor qualifies for an income tax charitable contribution deduction for its full fair market value at the time of the gift even though the original cost was less.

The donor also avoids any tax on the amount of the gain which would become due at the time of a sale of the property.

II. Description.

A prospective donor most often considers his/her immediate cash situation when making a gift.

Cash usually represents a small fraction of net worth thus severely limiting the potential for giving.

If the donor plans a gift his/her first consideration will be what to use to make a maximum gift at minimum net cost.

Most donors have among their assets something which is highly appreciated (see overhead on “Portfolios of the Wealthy” in Chapter 3). Assume that they have a parcel of real estate for which they presently have no particular use.

If they gift the property they receive an immediate contribution deduction for its full fair market value regardless of the original cost. They can deduct the gain from current income tax and completely avoid the gains tax that would be due when they sold the property. They would also avoid the effort and cost involved in the sale (listing, marketing, negotiating, and realtor fees) which now becomes the option of the charity.

They can make a larger gift realize maximum tax benefits; avoid the cost and effort of sale; remove the asset from their estate, and have the satisfaction of making the gift.

Therefore it is more economical to use appreciated property for gift purposes than it is to use cash. If the donor is reluctant to part with the property he/she could purchase it back at the prevailing market price. In that way the donor gets a new cost basis so that he/she will never pay a tax on the amount of gain on the property used to make the gift.

Real property. Conveyance of title by deed plus recording or registration of title may vary with state regulations.

A. Quit claim deed to transfer title as is with possible lien or encumbrance.
B. Trust deed is generally the same but used in various states.
C. Warranty deed to transfer title with guarantee to be free of encumbrance.
D. Record of title, usually at the local county court agency, is required to complete the transfer of property.

Mortgage. Mortgages can be transferred by a properly executed assignment of mortgage. Contract for deed (trust deed in some states) requires a properly executed assignment of the contract and usually a recorded title. Generally the note or installment obligation may secure the contract and should be renewed and properly executed.

Insurance. Insurance transfer requires an assignment of ownership plus designation of beneficiary. Designation of beneficiary by itself is subject to change, revocation, or lapse and does not constitute a complete gift. Notes for loan or obligation require a properly executed assignment. Such notes should also be renewed and properly executed.

Tangible personal property. Tangible personal property is generally transferred by delivery and possession and should be properly receipted in kind.

Future or partial interests. Future or partial interests are subject to the above depending on the kind of property and generally may include some form of agreement or contract.

Planned deferred gift arrangements. Planned deferred gift arrangements as specific legal contract trusts or agreements must conform to regulation and must be properly executed. However, an executed irrevocable agreement does not constitute a complete gift arrangement until the property used to fund the agreement has also been properly transferred by one of the above forms of conveyance.