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Tuesday, July 25, 2006

CHARITABLE CONTRIBUTIONS OF REMAINDER INTERESTS IN RESIDENCES AND FARMS

Generally, when someone gives property to charity, to get an income tax deduction for the contribution they have to give their entire interest in the property, not just a partial interest. However, there is an important, but often overlooked, exception to this partial interest limitation that allows contributors to transfer a remainder interest in a residence or farm to a charity. A remainder interest in property means that someone is allowed the use of the property for their lifetime or for a term of years, and at the expiration of that term, the "remainder interest" then passes to the person or entity designated to receive the remainder interest.

Certain tax advantages accrue to the contributor in the circumstances. First, the contributor gets a current income tax deduction, even though he or she can continue to use the property and the property doesn't pass to the charity for many years. Second, the contributor can gift a life interest in the property to a third party along with a remainder interest to charity - this reduces the value of the taxable gift to the recipient of the life interest. Lastly, the charity gets immediate title to what is hopefully an appreciating asset - while the charity will not get possession of the property immediately, it is guaranteed to receive the remainder interest even if the contributor later changes his or her mind.

In regard to what residences may be transferred, the only requirement is that the property be a residence of the contributor. Thus, a second home or vacation home can qualify as a personal residence for this purpose. Even a yacht can qualify if it is used by the contributor as a residence.

There are some tricky aspects to these contributions. First, the transfer of the remainder interest must be by deed, and not by a trust. Second, there cannot be any restrictions on the remainder interest. For example, the contributor cannot require the remainderman to consent to any sale of the underlying property. Lastly, in determining the amount of the charitable contribution for deduction purposes, straight-line depreciation is calculated into the valuation, making estimates of future value, and allocations between depreciable and non-depreciable property important.
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