Rent Property to Charity and Win …
For federal gift-tax purposes, the right to use the real property is a present interest that will qualify for the annual exclusion. Each year a donor can transfer up to $12,000 to as many individuals as he or she wishes. (Note: Effective Jan. 1, 2006, the annual exclusion amount increased from $11,000 to $12,000.) A charitable donee is considered a person for this purpose. Thus, if the fair market value of the foregone rent is $12,000 or under, the donor will not have made a taxable gift for federal gift-tax purposes. If the donor is married and his or her spouse joins in the gift, that amount will increase to $24,000.
The $12,000 annual exclusion applies only to federal gift tax. With respect to federal estate tax, the issue is more complex. If the donor dies during the term of the rent-free lease, the charitable organization’s interest in the real property — the lease term — won’t provide a charitable deduction to the deceased donor’s estate. Again, this is because the charity’s interest only is in the use of the property and not the deceased donor’s entire interest. Because there’s no federal estate tax equivalent to the annual exclusion, a donor might be well advised to provide that the charitable organization’s right to use the property terminate at the donor’s death.
Donating use is key
This concept isn’t limited to real property. A donor could donate the rent-free use of an automobile or a work of art. The key is that the donor is donating the right to use the property, not the property itself. However, for an item that generally isn’t leased by the donor, the ability to avoid income tax on the forgiven rent is illusory, whereas if the donor ordinarily would lease the property, the donor enjoys a real tax benefit by not having to pay tax on the forgiven rental income.