Gifts of Remainder Interests
Under the general rule for charitable contributions, no income, gift, or estate tax deduction is allowed for a gift of a partial interest in property. There are special exceptions for gifts of remainder interests in trust (charitable remainder trusts are discussed elsewhere on this website) and gifts of a remainder interest in a residents or farm.
This type of gift permits an individual to irrevocably give the remainder interest in her residence to a charity, but keep the right to live in the home for the remainder of her life. The donor receives current income and gift tax deductions for the present value of the remainder interest that the charitable organization will receive. This value is computed under regulations issued by the Internal Revenue Service. The computation includes a reduction for depreciation computed under the straight-line method and is discounted to present value by use of the appropriate discount rate if effect for the month of the gift. When it receives title to the property, the charity may use the property in its exempt purpose (residence, conference center, retreat, etc.) or sell it. While the law specifies a residence, it does not have to be a "principal" residence, but maybe a vacation home. A boat also qualified for this type of deduction is the vessel is used by its owner as a residence. This favorable provision as a gift vehicle does not extend to personal property (household furnishings, for example).
This type of gift is most appropriate for those individuals who are philanthropically inclined and who can best fund the gift with their home or farm. This type of gift should not be placed in trust. The instrument conveying the remainder interest should clearly specify that the life tenant is responsible for upkeep, maintenance, and taxes on the property.
The rules for computing and deducting gifts the remainder interest in a personal residence or farm are somewhat complex. We have assisted donors and their charitable beneficiaries in structuring gifts of remainder interests in property to ensure that all parties receive the maximum benefit from the donation. We can assist you or your organization in structuring gifts of this nature.
©2008 Ronnie C. McClure, PhD, CPA