Optimize Donations with Noncash Assets
Thoughts of year-end tax planning are a seasonal tradition as pervasive as the leaves turning color. As you consider your charitable priorities, your accountant may have already discussed the advantages of making a charitable gift of publicly-traded stock that has appreciated in value over time. For business owners, shareholders of privately held companies and real estate owners it is equally important to keep in mind that your noncash assets — such as real estate and privately held/closely held business interests— can be optimal donation candidates for savings taxes on capital gains.
Bryan K. Clontz, founder and president of Charitable Solutions, LLC, offers a seasoned perspective on the advantages of unlocking the tax savings of gifting privately held stock and/or real estate to a donor advised fund at Greater Cincinnati Foundation (GCF). Your GCF philanthropic advisor is happy to help you explore making gifts of non-cash assets. As always, we recommend that you explore the specifics of your personal giving strategy with your tax professional.
Bryan K. Clontz writes:
Assets other than cash are prime candidates for donations. The average donor has more wealth in illiquid, noncash assets than in cash and publicly-traded stocks. This can include property such as real estate and business interests, along with items like cryptocurrency, collectibles, mineral rights, artwork or intellectual property. Partnering with an experienced community foundation such as Greater Cincinnati Foundation (GCF) to unlock the value in these types of assets can be extremely favorable for both you as a donor and for the charities you wish to support.
Take the following examples of the opportunity for donating noncash assets:
- In nearly every survey, cash or cash equivalents represent the smallest portion of the overall balance sheet for high net worth individuals/major donors. The most current research suggests cash represents 7 percent of total high net worth assets in 2015.
- The aggregate domestic stock market value as of 2017 was approximately $32.1 trillion.
- The aggregate value of privately-owned US land (not government owned), as of the first quarter of 2018, is approximately $53.2 trillion.
This suggests that, for many charitable individuals, the best assets for donations are those other than cash and marketable securities.
These assets are often prime candidates for donation because they are highly appreciated, meaning that if the asset was sold, there would be significant capital gain. This presents an appealing proposition for donors and charities alike: donors can avoid paying capital gains taxes on the donated asset and charities receive property which has increased in value. Better still, donors can receive a significant tax deduction.
This strategy is particularly appealing under the 2017 tax law. With the new, higher standard deduction, “bunching” donations has become a more popular tactic, which means donating one or more high value assets. That allows donors to deduct the value of the property and potentially to still manage charitable giving through use of a donor advised fund.
This bunching strategy can work especially well with an appreciated non-cash asset. This tactic also means the donor is still holding the cash that they might otherwise have donated to meet their charitable goals. That added liquidity means flexibility that would be lost (relatively speaking) with a cash donation.
Below is a simple example of a donation of real estate:
Donor has a vacation home worth $1 million, which she bought many decades ago and has an adjusted basis of $0. If she were to sell the home, she would pay as much as $200,000 in federal capital gains taxes alone (plus possible state taxes). Instead, Donor could donate the real estate and allow the charity to sell the home. In that case, there is no federal capital gains tax. Assuming $75,000 of closing costs and brokerage fees in both cases, the amount going to charity if Donor sells is $725,000. If Donor instead gives the property to charity and the charity sells, the amount staying with the charity is $925,000. From a tax perspective, a cash donation of $725,000 means a deduction of $725,000. A donation of the home means a fair market value donation of $1,000,000.
Another example is a business interest donation:
A business owner (C-corp, S-corp, Limited Partnership, LLC, etc.) may be able to receive a fair market value deduction for a charitable donation. Often, this occurs prior to a merger/acquisition, new funding/investor round, IPO, ESOP sale or other partial or full exit. The tax benefits are similar to the real estate example above.
There are a few special considerations for donations of noncash assets (including any kind of illiquid asset, not just real estate and business interests):
- Donations valued at over $5,000 require a “qualified appraisal,” as defined by the IRS.
- Donations of complex assets can require advance planning and may be a longer overall process, depending on the requirements and procedures of the charity accepting the donation.
- Deductions for noncash donations are limited to 30 percent of adjusted gross income in the year of donation. Cash donations are limited to 60 percent of adjusted gross income.
- Assets which have debt can still be donated, but may result in tax complications. That includes debt inside a pass-through business entity and mortgages on real estate.
The main takeaway for those who are charitably inclined should be that assets other than cash offer both opportunity and flexibility. As such, donors should always consider their illiquid assets in their tax and charitable planning. Working with an experienced community foundation such as GCF to make a charitable contribution using non-cash assets allows for potentially significant capital gains tax savings while creating charitable dollars for your donor advised fund. I encourage you to reach out to your tax planning professional as well as your philanthropic advisor at GCF to explore the benefits of making this type of gift to fuel your philanthropy.