Many times, a substantial gift to EMM is the result of a real estate transaction. The size of a real estate transaction magnifies the importance of properly planning for ownership transfer. Planned properly, a real estate gift is a wonderful way for a donor to help expand God’s kingdom while meeting his or her financial needs.

The term real estate refers to various types of property – vacant land, residential property, commercial property, a farm, farm land, rental property including residential or commercial property, vacation property, or development property. All of these types of property may be used as gifts to Eastern Mennonite Missions.


Outright Gift
The simplest real estate gift is an unconditional transfer of ownership: you donate a complete or partial interest in the property. This gift offers you two advantages: You receive a charitable deduction for the current market value of the property; and you avoid any capital gains tax that would have been due on the sale of the property.

Example 1
Norman and Sarah Lehman own land that they bought ten years ago for $15,000. It was recently appraised at $25,000. The Lehmans plan to donate this land to EMM.

They will receive a charitable deduction for $25,000, the fair market value of the land on the date of the gift. In the Lehmans’ 38 percent tax bracket, this amounts to a $9,500 deduction. Additionally, they will avoid the capital gains tax of $2,000, which would have been due if they had sold the property.

Example 2
Lori Espinoza makes a gift to EMM of 25 percent ownership in a rental property she bought 20 years ago for $75,000. At the time of the gift, the property was appraised at $200,000. She is able to claim a $50,000 charitable deduction ($200,000 times 25 percent).

When Lori and EMM sell the property, she will avoid the capital gains tax that would have been due on the portion of the rental property she contributed to EMM.


Bargain Sale
A second option for a gift of real estate is a bargain sale. In this arrangement, you agree to sell the real estate to EMM for a price below the fair market value of the property. You receive a charitable deduction for the difference between the fair market value of the property and the sale price to EMM.

Example 3
Tyrone Johnson has developed a piece of vacant land into six building lots. One parcel has been appraised at $30,000, and Tyrone offers to sell it to EMM for $20,000. When EMM purchases the parcel for $20,000, he may claim a charitable deduction of $10,000.


Retained Life Interest
Some special options may make a gift of your residence or vacation home more attractive. For example, you may give property to EMM but retain the right to use the residence for the remainder of your life. You and EMM agree on who will be responsible for maintenance, taxes, and insurance expenses.

You receive a tax deduction in the year of the gift, even though EMM will not receive unconditional ownership until you pass away. The deduction is based on the value of the eventual contribution.

If you later decide to make a gift of the right to use the home, an additional charitable deduction becomes available.

Example 4
Sheila Bontrager is 82 years old. Part of her financial plan includes a directive in her will that gives her residence to EMM after her passing. However, to take advantage of a charitable deduction while she is alive, Sheila agrees to give her property to EMM through a simple deed of trust. The deed allows her to retain the right to use and enjoy the property for the remainder of her life. She will also continue to be responsible for all the expenses related to the property.

An appraisal of Sheila’s residence valued it at $150,000. By making the retained life interest gift, she is able to claim a charitable deduction of approximately $102,000. She can later decide that she no longer wants to retain the right to live in this property. If she gives it as a gift to EMM, she will be eligible for an additional charitable deduction.


Charitable Remainder Trusts
In some situations, you may need to continue to receive a flow of income from the property. You can accomplish this through the use of a charitable remainder trust. A charitable remainder trust is a legal entity capable of owning and selling real estate.

You create a charitable remainder trust and transfer ownership of the property to the trust. The trust sells the property and invests the proceeds to provide an income flow. Because the balance of the fund goes to charity when the trust expires, the trust does not pay capital gains tax. The trust uses its income to make payments to you or other beneficiaries.

Using a charitable remainder trust is a good way to “unlock” the income potential of real estate which has increased significantly in value, yet avoid capital gains tax.

Example 5
Lok and Fen Li are both 70 years old and have three adult children. Their assets include 22 acres of land they purchased 18 years ago for $35,000. Because of recent developments, the land’s market value has risen to $180,000. The Lis currently lease the land for $5,400 per year, providing them a three percent return on the value of this real estate.

The Lis decide to create a charitable remainder trust and gift their property to the trust. The trust will pay them seven percent of the value of the trust for the remainder of their lives. They will receive $12,600 annually, and at their passing, the balance of the trust will be forwarded to EMM for use in its ministries.

In addition to the increased income, the Lis receive a $56,000 charitable deduction that they can use to offset their taxable income this year. They may carry over any deduction they are unable to use for the next five years until they deduct the entire amount. Additionally, they are able to avoid the capital gains tax of $29,000 that would have been due had they sold the property for $180,000.

By using a charitable remainder trust, the Lis are able to:
• Increase their annual income from their property from $5,400 to $12,600. (See
note below.)
• Avoid capital gains tax of $29,000 on the sale of the property.
• Receive a charitable deduction of $56,000 that can reduce their taxable income in this year and in future years.
• Make a significant gift to the ministries of EMM.

Note:
In some situations, the donors place this additional income in a wealth replacement trust. In the above example, the Lis would use all or a portion of the additional $7,200 income to fund a wealth replacement trust. The wealth replacement trust would purchase a $180,000 life insurance policy naming the three children as beneficiaries. At their passing, the $180,000 policy would pay $60,000 to each of their children, while EMM would still receive the balance of the charitable remainder trust.

Many supporters of EMM have found that gifts of real estate enhance their ability to build God’s kingdom. But because real estate gifts are complex, it is important to contact your tax and legal advisors before beginning the ownership transfer process. The earlier your advisors are involved, the more efficient and enjoyable you will find the gift planning process.

These are just a few examples of how you can use gifts of real estate to further God’s kingdom and help you meet your financial goals. If you have additional questions about gifts of real estate, or if you would like to discuss in detail how a gift of real estate may be appropriate for your situation, please feel free to contact the director of financial resources at EMM, 717 898-2251.

Other financial planning resources available from Eastern Mennonite Missions: Charitable remainder trusts; Gifts of stock; Charitable gift annuities; and Gifts of retirement funds.

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Examples based on rates adopted on 5/12/03 by the American Council on Gift Annuities. Please contact Eastern Mennonite Missions’ director of financial resources for current rates. Examples are fictitious and do not refer to actual transactions.

Eastern Mennonite Missions is not engaged in rendering legal or tax advisory services. For legal or tax advice, please consult your own professional advisor.

Other ways to give

Bequests
A bequest is the simplest planned gift, given after your death through a directive in your will. It can be in the form of real estate, retirement funds, or stock.


Charitable Gift annuities
A charitable gift annuity allows you to make a contribution to EMM in exchange for a fixed flow of income for the rest of your life. more >>


Charitable remainder trusts
A charitable remainder trust allows you to make a contribution to EMM, with flexible options for how you want EMM to manage the trust’s assets. You may name yourself, or anyone else you choose, as the beneficiary. more >>


Life insurance and retirement plans
These assets offer various opportunities for benefiting your family and EMM’s family. The rules regarding gifts of retirement funds continue to change. To discuss the options available, contact Don Brubaker at 717 898-2251.