The Gift That Pays You Back

​The joys of being a landlord never seem to end, especially during the holidays. Thanksgiving leftovers and football might be interrupted with a phone call from a tenant that their kitchen sink is backed up. Looking ahead to January, you wonder if the rent collected will be enough for the property taxes, or will it turn out that the tenants purchased Christmas presents with their rent money?

The Benefits of Investing in Real Estate

When you invested in rental property, you did it for good reasons. But now, it might be the right time to sell. Prices are up. Rental property has not been a tax-advantaged investment for some time. It is becoming more challenging to manage the property yourself. Responsible and affordable property managers are hard to find. 

One of the downsides to selling is federal capital gains taxes and state income taxes. The top rates are 23.8% federal (20% capital gains plus 3.8% Medicare surtax) and 13.3% California state income taxes for a total of up to 37.1% on the taxable gain.

Also, if you sell now, you would have to list the property, find a buyer, and pay fix-up costs, commissions, and escrow fees.

An Alternative to Selling

Instead of selling the property, consider a charitable planned gift which can allow you to dispose of the rental, avoid selling costs, defer capital gains and state income tax, and provide you with a significant tax deduction.

In exchange for the property, you could receive income for life, probably more than your current net rent cash flows, without the hassle of managing the property. Now that is a gift worth considering. With a little planning, you can make a meaningful impact in the community while meeting your own retirement and legacy goals. You can turn your assets into income streams for yourself and your loved ones.

 
Charitable Gift Annuity

The simplest charitable arrangement that pays income for life is the Charitable Gift Annuity (CGA). Many nonprofit organizations, including the RCCD Foundation, can work with you to arrange this type of charitable planned gift. 

Here is how it works: You make a gift to charity using cash, stocks, or property. In return, you receive a monthly or quarterly payout with the rate based on your age. The benefit here is security- CGA rates are fixed and immune to market fluctuations. At the end of your life, the charity receives the remainder of the gift.

For example, based on the donation of property worth $800,000, a 60-year-old may receive a rate of 4.7% (paying $37,600 annually) in immediate income, while an 85-year-old will see a rate of 8.3% (paying $66,400 annually) for the same gift. The charity invests the funds and guarantees your life income with their assets. 

The donor receives a charitable tax deduction, which can be carried forward for up to five years. A 60-year-old would receive a tax deduction of approximately $180k. The deduction for the 85-year-old would be around $367k. Typically, a significant portion of your annual income is tax-free. In addition, capital gains are reduced and spread over a number of years, providing additional tax savings.

Charitable Remainder Trust

If you are looking for a little more control and flexibility, consider a Charitable Remainder Trust (CRT). A CRT is more complex than a charitable gift annuity. It will allow you to set more terms, like where to invest the funds and how much income will be paid out. Here are the basics: You contribute stocks or property to a CRT, and when the trust sells the property, it is exempt from paying capital gains tax. As a result, the full value of the asset can be invested to benefit you and eventually the charities you name.

Additions to a CRT are allowed, and the trust can pay out to beneficiaries of multiple generations. Thus, you can leave an inheritance to your heirs through an income stream rather than a lump sum distribution.

A CRT is not a do-it-yourself project. Consult with an experienced estate and gift attorney to set up a CRT.

This year, instead of making several small donations that may no longer be deductible, consider leaving a legacy with a planned gift to the RCCD Foundation. The power of charitable gift planning is that you can relinquish assets you no longer want or need in exchange for income for life and a significant tax break. For more information, contact the Foundation at (951) 222-8626 or foundation@rccd.edu.

 

Michelle C. Herting is a Certified Public Accountant (CPA), an Accredited Business Valuation Specialist (ABV), and an Accredited Estate Planner (AEP). She has owned a private consulting practice since 1997 and has three locations in Southern California. Michelle joined the RCCD Foundation Board of Directors in July 2021 and currently serves on the organization's Finance Committee.​