Dave and I decided to give one gift this year, rather than several smaller ones, and maximize the impact. We felt that a gift to child care would be one that provided an immediate impact in an area of critical importance.

Nancy Borghesi (’69 BA L&S), married to David (’70 BBA)

FEATURED ARTICLE AUGUST 2003

Estate Planning: Real Estate

Your home is likely one of the biggest investments in your estate plan. While two out of three families in the United States own their homes, a real estate investment can require a lot of time, maintenance and expense. Even in a strong market, selling a home, farm or commercial property and converting its value to cash can take time. This has major estate-planning implications, especially in regard to the death-tax liability attributable to real estate holdings.

For that reason, many real estate investors find appreciated real estate is their best asset to give to charity. By doing so, you can reduce or eliminate the capital-gain tax that would be due if the property is sold. You also avoid the hassles of trying to sell your property.
Example: Years ago Tom bought undeveloped land outside the city for $10,000. Now, because the city has grown in that direction, the property is worth $100,000. If Tom sells the property, he will owe a tax of $13,500 because of the 15 percent capital-gain tax.

Instead, Tom, a long-time supporter of the University of Wisconsin-Madison, decides to give the land to the UW Foundation. He does not recognize any gain, and he can claim a deduction for the land's full $100,000 fair-market value. In his 33 percent federal income-tax bracket, Tom's gift saves him $33,000. For Tom, the real cost of giving us the land is only $53,500 ($100,000 value - $33,000 income-tax savings - $13,500 capital-gain tax avoided).

As Tom's situation illustrates, real estate is adaptable to a variety of charitable-planning strategies—some available only with real estate:
  • Give a fractional interest. Ownership of a piece of real estate is designated through documents recorded in an appropriate government office. It is a simple matter to transfer an undivided fractional interest in the property equal to the intended value of the gift to the UW Foundation.

  • Participate in a bargain sale. This strategy is useful when you want to use real estate to make a gift, but also need to recoup some of its value. As the name implies, you transfer real estate to the University of Wisconsin Foundation in exchange for a payment that is less than the full value of the property.

    Typically, you qualify for a charitable deduction equal to the difference between the fair-market value of the property and the amount of the payment received. In addition, you have to recognize the capital gain attributable to the amount received from the sale.

  • Make a gift and retain possession. Perhaps you would like to give your residence or vacation home to the UW Foundation, but you also would like to live there and enjoy the dwelling for the rest of your life. You could leave your home to the Foundation in your will, but as a homeowner you would not receive any current income-tax benefits by making the gift that way.

    Instead, with a gift of a remainder interest with a retained life estate, you can continue to live in your home for life while also receiving a valuable charitable deduction by transferring the property to the UW Foundation, subject to your right to live there. Normal insurance, maintenance and taxes remain your responsibility. If you later decide to vacate the property, you may rent all or part of the property to someone else or sell with our cooperation.
  • Example: For some time, Mary, 78, has wanted the UW Foundation to have her home, worth $400,000. In order to realize tax savings during her lifetime, Mary transfers the house to the Foundation now, subject to a retained life estate for her lifetime. This allows her to claim a charitable deduction of more than $254,800. In her 35 percent federal income-tax bracket, this saves her more than $89,180 in taxes.

  • Receive a stream of income. Real estate is an excellent asset to fund a charitable remainder trust, which makes payments for life or for a specified number of years (up to 20) to one or more designated beneficiaries. These payments are based on the value of the trust's assets. At the end of the trust term or the death of the last beneficiary, the remaining assets pass to the UW Foundation. The value of this "charitable remainder" qualifies for a charitable deduction.

We're Here to Help

While many types of real estate gifts are not complicated, they do require careful planning—including a qualified appraisal to support your claim for a deduction and usually an appropriate environmental testing certification. We are happy to answer your questions and explore how a gift of real estate may benefit you. To request additional information, simply fill out this form.