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What to Consider Before Accepting a Property Contribution

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A gift of property can be very generous. If your nonprofit is offered such a contribution, you might be tempted to jump at the opportunity. But it’s crucial to carefully consider gifts of real property (real estate) to avoid any unpleasant surprises and negative consequences.

Start by reviewing whether the potential gift meets the requirements of your organization’s gift acceptance policy. Then conduct pre-acceptance due diligence by taking the following considerations into account.

  • Does the donor hold title to the property? This assurance can be obtained by acquiring a copy of the registered deed showing the donor is the titleholder, obtaining a copy of a title insurance policy insuring the donor’s title to the property, and confirming that the donor is shown as the titleholder on the property tax records of the jurisdiction where the property is located.
  • Are there any liens on the property? The big items to look for include unpaid property taxes; a mortgage, land contract, or other similar encumbrance; mechanics’ liens; and unpaid utility bills. We suggest creating a gift agreement in which the donor represents the absence of liens and agrees to indemnify your organization if anything surfaces at a later date.
  • Will your organization receive a clean title? This starts with ascertaining whether the donor plans to give your organization a general warranty deed or a quitclaim deed. In the case of a general warranty deed, the donor is warranting title (among other things) to the property. This is valuable to the donee organization, but only if the donor is able to cure any defects in title that may arise, including paying any amounts that must be paid to cure those defects. For this reason, it is also advisable for your organization to be named the beneficiary of a title insurance policy. This could be paid for by the donor or by your organization. If the donor is to pay, this should be spelled out in the gift agreement.In general, it’s advisable to avoid a quitclaim deed, which only transfers whatever rights the donor has in the property to the donee. If there are defects in the donor’s title, he or she has no obligation to cure them. If your organization is willing to accept a quitclaim deed, it’s doubly important to obtain a title insurance policy. A quitclaim deed could also impair your ability to sell the property in the future, depending on the circumstances.
  • Are there any environmental hazards? Your due diligence should include a Phase 1 Environmental Site Assessment (ESA) for residential real estate or similar low-risk real property. A Phase 2 ESA is recommended for industrial or commercial property. You should obtain the advice of a qualified environmental specialist to confirm the proper assessment.
  • Do you understand the property and its surroundings? Start with a survey of the property to understand its boundaries and what your organization will be acquiring. Next, conduct a visual inspection of the property and its surroundings to observe the condition of the property, the nature of the surrounding properties, and the impact of these factors on the potential salability of the property. In some cases, this process may include an inspection by a qualified inspector.
  • What other consents need to be obtained? If the property is owned by a business entity or there are multiple owners, make sure there are no other parties from whom consent to the transfer must be obtained. A representation as to this fact should be included in the gift agreement.
  • How will the property be insured? Donated real property should be insured against loss and liability from the moment of transfer. Even raw (undeveloped) land should be covered by some form of insurance policy against liability arising from those entering the property. Before accepting the gift, make sure your organization is prepared to obtain this insurance and pay the premium. The donor may be willing to assist with an additional cash contribution.
  • How will the property be maintained? If the property has structures, you should have a plan to defray the ongoing repair and maintenance costs. This may be covered by rents from existing tenants, or you may need to be ready to cover these costs out of operating funds.
  • If the property is leased:
    • If there are tenants, are the lease agreements assignable? Who is responsible for effecting the assignments? In general, lease agreements are assignable unless assignment is prohibited or the tenants’ consent is required under the terms of the agreement. Review any existing lease agreements for this. In addition, the gift agreement should spell out which party is responsible for preparing the assignments (which must be signed by the donor) and notifying the tenants (and obtaining tenant consents if required by the lease agreement).
    • Are there any special lease terms that will bind your organization to specific performance? Lease agreements may require a landlord to perform maintenance or make updates or renovations at specific intervals. This may take cash your organization does not have to invest. Review the lease agreements for these commitments.
    • Is the property producing net cash flow? Ask to see both an income statement and a balance sheet for cash flowing property. This will help you ensure the property is self-sustaining and will not be a drain on your organization’s resources, even if the property is only expected to be held for a brief period. In addition, examine whether the existing rents are market rate rents and whether the existing expenditures for management, maintenance, and repairs are reasonable.
    • Are there any outstanding contracts or agreements? If so, what are the terms? The donor may have engaged the services of a property management firm whose contract will transfer to your organization. Other possible contracts include maintenance contracts for heating, cooling, and ventilation equipment, landscaping and lawn care, elevator maintenance, and general maintenance.
    • Will security deposits be transferred along with the property? Prepare for the transfer of existing security deposits from the donor to your organization. Otherwise, your organization will need to refund security deposits from your operating funds.
  • Are there any existing offers to purchase the property? Has the donor made any commitments to sell the property? The existence of such offers or commitments may make the property more or less desirable as a charitable gift, particularly if you anticipate using the property in fulfilling your charitable mission.
  • What is the value of the property? The best evidence of value is a qualified appraisal of the property, which the donor will also need to claim an income tax deduction for the gift. It’s important to understand the property’s value when evaluating the economics of the transfer. If it’s a high-value property that is immediately salable, your organization may be willing to incur some expense to accept the property. If the property is of little value, you may decide it’s not worth expending significant effort to obtain it.
  • Will the donor transfer all of the donor’s interest, or only part? A partial interest gift in real property is a permissible gift for income tax purposes as long as the donor gifts a pro rata share of every interest the donor has in the property. Such a gift can be achieved by subdividing the property or contributing an undivided interest and thereby creating a cotenancy. This question is important because it affects the salability of the property. If the donor doesn’t plan to sell, your organization may be stuck with property on which you must pay property tax and, in the case of unleased property, no cashflow from the property to pay the tax. Weigh this carefully. In a gift agreement, the donor may pledge to not withhold his or her consent to sell the property.
  • How will your organization hold the property? You may choose to accept the property as a direct gift to your organization. The potential issue here is that latent liabilities (e.g., environmental liabilities) may follow the donated property to your organization. For this reason, it is often advisable for donee organizations to form a single-member limited liability company to accept the property. The IRS acknowledged the validity of this technique in IRS Notice 2012-52.

Working through and planning for these considerations can help you accept a real property gift that provides real value for your organization. We can help you assess and plan for gifts of real property as well as other contributions. Please contact us to learn more.

Ted Batson

Ted serves as partner, tax counsel, and Professional Practice Leader – Tax. As a certified public accountant and tax counsel, Ted advises exempt organizations of all sizes on a wide range of issues. This includes consulting on tax and employee benefit related matters, representation before state and federal tax authorities, and assistance with firm audit or advisory engagements to formulate advice and counsel on important operating and tax issues. Ted also leads the firm’s tax preparation practice, including IRS Forms 990 and 990-T and related state forms.

15 Comments

  • Very detailed love the advice would love to have you guys help in my Nonprofit business affairs..

  • Marian Young says:

    Thanks for the thoughtful and detailed article Ted, it is very helpful. I’m on a non-profit board and we are wrestling over a very generous but also very daunting real estate gift offer. So many questions and things to consider.

  • Steve Ford says:

    Could an individual donate part of the value of the property to a 501c3 and the same501c3 pay the remaining value of the property?

    Example: $500k property – donate 250k and be paid 250k?
    Thanks, Steve

  • Aaron says:

    Ted odd question. We are purchasing a home and my wife and I are owner and president of a nonprofit for a syndrome that my daughter has. He has potentially offered a reduction in the price of the home to us if he is able to donate the remaining equity in the house to the nonprofit to be distributed to us as the buyers. Is that legal?

    • Ted Batson Ted Batson says:

      Aaron,

      While there is theoretically a way to make the proposed transaction work, it would result in taxable compensation to you equal to the amount distributed to you. In addition, for the seller/donor to qualify for an income tax deduction, they could not earmark the equity in the home for ultimate distribution to you. That would have to be an independent action of the board of the nonprofit. Further, you should consider whether adding the equity distributed to you to your compensation would make your compensation so unreasonable that it would trigger the excise tax on excess benefits paid to an insider. I can’t judge the likelihood of this without more facts. Finally, you should consider the optics of this kind of transaction to other constituents of your organization.

  • Tracey Nettles says:

    Ted, we have a SC not for profit 501c3 that has an opportunity to have property donated to it in NJ with a value of $375,000. We want to make sure that if the 501c3 accepts the property and then transfers the property into an either SC SMLLC (register the SC SMLLC as doing business in NJ) or a NJ SMLLC, that it will not create a taxable event for the not for profit. Can you give me guidance or somewhere I can research this question.

    • Ted Batson Ted Batson says:

      Tracey,

      Generally speaking, the best plan in this scenario is to form a single-member LLC prior to receiving the gift and have the donor transfer title to the property to the LLC, not the not for profit. In Notice 2012-52 (https://www.irs.gov/pub/irs-drop/n-12-52.pdf) the IRS addressed this scenario and stated that, since a single-member LLC is a disregarded entity for Federal income tax purposes, completing the gift in this fashion will be treated “as a charitable contribution to a branch or division of the U.S. charity.” Thus, even though the deed is made out to the single-member LLC, the receipt can be issued by the nonprofit. The IRS goes on to state “To avoid unnecessary inquiries by the Service, the charity is encouraged to disclose, in the acknowledgment or another statement, that the SMLLC is wholly owned by the U.S. charity and treated by the U.S. charity as a disregarded entity.”

      Accordingly, the gift receipt could be written as follows:

      Thank you for your gift of [describe the property] to [name of nonprofit], through [name of the LLC]. [Name of the LLC] is wholly owned by [name of nonprofit] and treated by [name of nonprofit] as a disregarded entity. We received your gift on [date of receipt]. No goods or services were provided to you in exchange for your gift.

      Note this last sentence should be altered to reflect any goods and services provided were goods and services provided.

      However, if the property is received by the nonprofit and then you desire to transfer it to a single-member LLC, there is no tax consequence to this transfer for several reasons.

      First, since the default treatment of a single-member LLC is that it is disregarded as being separate from its single-member for Federal income tax purposes, the transfer is effectively ignored for Federal income tax purposes. In other words the transaction is deemed as a transaction by the nonprofit with itself, which means there is no realization of gain/loss upon the transfer. The disregarded entity rules are discussed at Treas. Reg. § 301.7701-3(b)(1)(ii).

      Second, a transfer of property in exchange for an ownership interest in a corporation (which is not the case here, but which is analogous) where subsequent to the transfer the transferor has a controlling interest in the transferee corporation is a nonrecognition event under IRC § 351(a).

      Third, since the transferor is a nonprofit organization, even if there were realization of gain upon transfer of the property to the LLC, there would be no taxation of that gain. This is because capital gains realized by 501(c)(3) organizations are excluded from income taxation under IRC § 512(b)(5).

  • Sue Thomas says:

    If we want to donate a piece of property to a charity or gift it back to the county, will we be released for any future liability concerning the land?

    • Ted Batson Ted Batson says:

      Sue,

      This is a question best addressed to an attorney who specializes in real estate. But here is a general discussion that may be useful in guiding a discussion with the attorney.

      Such a gift will not protect the donor from certain types of liability that attach to any owner in the “chain of title” of the property. This is especially true of certain forms of environmental liability. Other types of liability, such as liability for injuries sustained by persons on the property, would still attach to the owner at the date of the injury until the statute of limitations has passed, even if there is a change in ownership in the meantime. Liability for mortgage obligations would generally have to be extinguished before the holder of the security interest in the property as collateral for the loan would release their security interest.

  • Linda says:

    I work for a university. A domestic donor wants to donate a villa in Tuscany to the university with the understanding that if the property cannot be used by the university for educational purposes it can be sold and the university keep the cost of the money. How do I begin to vet the property and if we move ahead with the donation who do I need on my team to ensure everything is properly done and the university is not at risk?

    What questions do I need to ask the potential donor?

    Thanks.

    • Ted Batson Ted Batson says:

      Linda,

      When contemplating a gift of real property located outside the United States, there are several things you should consider. Because each foreign jurisdiction will have its own unique considerations, not all of these will apply in every circumstance.

      1. You should have a local attorney versed in real estate matters that is licensed to practice in that country and who represents your organization and not the donor.

      2. You should confirm the manner in which you can own property in the country. For example, as an organization that is a foreign organization in that country, can you obtain direct title to the property? Or will you have to create a corporate entity in that country to take title to the property?

      3. You should understand the risks of property ownership in that country. For example, under local law and custom how do you know you will have good title to the property? What assurances can you obtain that other claimants to the property will not emerge? Is title insurance available?

      4. The local attorney should be able to help you ensure there are no liens against the property and that all property taxes and any fees that are unique to the country where the property is situated are current before you take title. Don’t assume that any understanding you have of property ownership in the U.S. will automatically apply to the foreign country.

      5. How will you determine the value of the property if you decide to sell the property?

      6. Is there a market for the property if you decided to sell it? It’s an awkward situation to accept such a gift only to discover you have to hold it for multiple years before you are successful in finding a buyer.

      7. Will you be able to visually inspect the property yourself or hire an agent to inspect it? Can you engage someone reputable to give you a true picture of the condition of the property?

      8. Does the utility of the property for your programming or the value of the property if you decide to sell it justify the expense you will incur to do your due diligence prior to accepting the gift? Note, that if you plan to purchase property in the foreign country for programming anyway, you will not necessarily be incurring more or different due diligence costs for a gift. But property that is the subject of a contemplated gift may or may not be the best suited for your needs.

  • Cheryl Jamison says:

    My husband died after constructing about 3/4 mile of live steam railroad track on our property in Tenn. I want to donate 21/2 acres to a group of live steam enthusiasts after I die as my son doesn’t want it. I have a revocable trust. I don’t know what this type of gift is called so I can have it put in the trust or would it be a separate document. Am working on a survey now. Would the deed reflect this group’s name or just put in my name. Thanks for your advice as not sure where to begin.

    • Ted Batson Ted Batson says:

      Cheryl,

      We are sorry for your loss. With regard to your question, we recommend that you speak to an estate planning attorney.

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