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Friday April 10, 2020

Case of the Week

Exit Strategies for Real Estate Investors, Part 12

Case:

Karl Hendricks was a man with the golden touch. Throughout his life, it seemed every investment idea that he touched turned to gold. By far, Karl was most successful with real estate investments. It was definitely his passion.

Amazingly, Karl continued to buy and sell real estate at the age of 85. For instance, about three months ago, Karl discovered a great investment property. It was a "fixer-upper" commercial building in a great area. While other nearby buildings sold for over $2 million, the seller needed to sell quickly and was asking just $1 million.

The condition of the building turned many buyers away. It was being sold "as-is," but Karl was not deterred. He could see great potential with the building and knew it would not take much to get it to market condition. Therefore, Karl swooped in, bought the building for $1 million and instantly hired contractors to refurbish the place.

After three months of hard work refurbishing the building, the place looked like new! In the end, Karl invested $250,000 in the building bringing his total investment in the property to $1.25 million. One month after the completion of the work, Karl was contacted informally by a company that expressed an interest in the building – a $2 million interest! This was no surprise to Karl. He knew the building was another great buy.

After Karl learned about the benefits of a FLIP CRUT, he eagerly wanted to move forward. (See Parts 1 and 2 for a full discussion of this decision.) It looked like the perfect solution. However, Karl did still have some important questions.

Question:

Karl wants to know what IRS forms need to be filed in order to substantiate his charitable income tax deduction. He knows the IRS will not just "take his word for it."

Solution:

This is a very important question and, accordingly, it is crucial that Karl follow the valuation and substantiation rules closely. In fact, taxpayers may lose their charitable income tax deductions when the required forms are not properly filed. In this case, Karl is making a gift of property (i.e., the building and land). Therefore, the critical form for Karl's situation is IRS Form 8283.

The basic rule states that if a donor makes a noncash charitable contribution greater than $500, Form 8283 must be included with his or her income tax return. Karl's property gift easily surpasses this $500 threshold, so he must file Form 8283.

The first section of Form 8283 – Part A – must include a description of the property. For tangible personal property, this description should include the general condition of the property. In addition to the description, if there are any restrictions or reservations of income, voting rights, acquisition rights or limits on use, those should be disclosed. For example, all charitable remainder trust interests must be disclosed. One method for disclosure is to attach the deduction calculation to Form 8283.

For gifts of property over $5,000 in value ($10,000 for closely held stock), Part B of Form 8283 must also be completed. Part B is essentially an appraisal summary. Karl's property gift exceeds the $5,000 mark, so he must complete Part B as well. There is an exception to this rule for publicly traded securities. Form 8283 instructions state that public securities are reported only on Part A. For public securities, signatures by the appraiser and charitable donee on Form 8283 are not required. However, public securities gifts over $250 still require a receipt or "contemporaneous written acknowledgement" from the charitable donee.

Part B requires that both the appraiser and the charitable donee sign and date Form 8283. With a charitable remainder unitrust or annuity trust, there may not be a vested charitable donee as the remainder recipient. Therefore, for all unitrusts or annuity trusts, the trustee signs as the charitable donee on Part B of Form 8283. In this instance, Karl is making a gift to a FLIP CRUT. Thus, the trustee of the FLIP CRUT will sign Part B of Form 8283.

If the noncash gift is over $500,000 in value, then both the Form 8283 and the appraisal are required. The appraiser and the charity still must sign the Form 8283. However, the full appraisal must be attached to the donor's income tax return. Sec. 170(f)(11)(D).

Finally, Karl must provide a copy of Form 8283 to the charitable donee or, in this case, the CRT trustee. The signature of the charitable donee or trustee is merely to acknowledge the receipt of the property. As such, the charitable donee or trustee is making no statement as to the proper value of the donated property.

Editor's Note: In Part 11 of this case study series, we addressed the appraisal rules and qualifications for an appraiser.

Published June 21, 2019
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Previous Articles

Exit Strategies for Real Estate Investors, Part 11

Exit Strategies for Real Estate Investors, Part 10

Exit Strategies for Real Estate Investors, Part 9

Exit Strategies for Real Estate Investors, Part 8

Exit Strategies for Real Estate Investors, Part 7

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Maria Poimenidou, 2020
Theodore Diamandopoulos
Memorial Scholarship

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Jelani Jones, 2021
Marie Dohr Memorial Scholarship

"Being at Lawrence has and continues to be a joy for me. I feel that I have grown so much as a musician, a teacher, and a friend through the awesome community of professors and friends I have met here. I feel that I am blessed to have such an awesome violin professor, and all the faculty members in the education department are so amazing. I have come to see Lawrence and the state of Wisconsin as my home, and I wouldn't change a thing."

Maggie Wright, 2021
Margaret S. and W. Paul Gilbert Memorial Scholarship

The scholarships I receive at Lawrence allow me to experience anything that I want to. I can pursue my love of Biology and Chemistry in classes that are engaging, with professors who care individually about their students. These scholarships also give me the freedom to participate in numerous extracurriculars that Lawrence offers as well, like the Fencing Team and the American Medical Students Association. All of the opportunities Lawrence offers me remind me how grateful I am to have received the Margaret S. and W. Paul Gilbert Memorial Scholarship."

Molly Chadwick Reese, 2020
Anne Prioleau Jones Tuition Scholarship in French

"Attending Lawrence is a privilege few are granted. Every moment spent at Lawrence solidifies a lifelong membership in a special group of peers, known as Lawrentians. The esprit de corps that Lawrence fosters makes the connection between students and mentors new and challenging, with both parties in a constant state of curiosity, respect, and encouragement. My experience as a language learner at Lawrence has not only helped my comprehension of the French language, but has enhanced my ability to communicate and connect with people in ways I never expected before attending Lawrence. As a French major and a student following a pre-medicine track, I have been afforded the privilege of diving into the sumptuous depths of the humanities, while satiating my hunger for scientific knowledge in concert. From this, I am able to fully appreciate the wonders of a liberal arts education. If not for the Anne Prioleau Jones Scholarship in French, I would be unable to join my peers in this quest for knowledge. I am very grateful for the donors' generosity."

Milwaukee-Downer Scholarships and Professorships

Some of the many recipients of Milwaukee-Downer scholarships gather for a photo with Carolyn King Stephens M-D'62 and Marlene Crupi-Widen M-D'55 in January 2014 at the annual scholarship luncheon.

Rosamund Victoria Bille Adler Scholarship
Dr. Charles E. Albright Scholarship
Helen Daniels Bader Scholarship
James G. and Ethel M. Barber Scholarship
Catharine Beecher Endowed Fund for Downer Women
Bessie A. Bell Scholarship
Berk Scholarship
Frederick C. Best Scholarship
Beta Study Club Scholarship
Lynde Bradley Scholarship
Lucia R. Briggs-Alumnae Scholarship
Edith Lange Brooks Scholarship
Anne Barman Caldwell Scholarship
Alice Miller Chester Scholarship
City of Milwaukee Student Funds Scholarship
Milwaukee-Downer Class of 1940 Fund
Milwaukee-Downer Class of 1942 Fund
College Endowment Association Scholarship
Janet Cope Crawford Scholarship
Jessie Mabbott Daniels Scholarship
F. T. Day Scholarship
Rufus Dodge Scholarship
Julia P. Ely and Hannah R. Vedder Memorial Scholarship
General Endowed Scholarship - M-D College
Dr. Alfred W. and Mrs. Ada F. Gray Scholarship
Berenice E. Hess Scholarship Endowment
Lucille Ray Hibbard Scholarship
Belle Austin Jacobs Scholarship
Helen McDermott Jurack and Ronald J. Mason Scholarship
Marjorie S. Logan Scholarship
Nellie Maxwell Scholarship
S. Annabelle & Paul McGuire Scholarship
Memorial Scholarship Fund - Milwaukee-Downer
Milwaukee-Downer Class of 1953 Scholarship
Milwaukee-Downer Class of 1955 Scholarship
Milwaukee-Downer Class of 1956 Scholarship
Milwaukee-Downer Class of 1957 Scholarship
Milwaukee-Downer Class of 1958 and 1959 50th Reunion Scholarship
Milwaukee-Downer Club Scholarship
Milwaukee-Downer/Lawrence College Consolidation 50th Anniversary Scholarship
Francis Evelyn Kelley Morgan Memorial Scholarship
O'Neill-Anderson Family Scholarship Endowment
Elizabeth A. Olson Scholarship
Gilbert Haven Peirce, Sr. and Emma Elizabeth Manor Peirce Milwaukee-Downer Scholarship
Aleida J. Pieters Scholarship
Matilda Siefert Puelicher Scholarship
Elizabeth Ann Richardson Scholarship
William M. Ross Memorial Scholarship
Elizabeth Rossberg Scholarship
Charles Frederic Sammond Scholarship
Mildred L. Schroeder Scholarship
Sivyer Educational Fund for Women
Marion Merrill Smith Scholarship
Dr. Elizabeth A. Steffen Scholarship
W. Mead and Elizabeth McKone Stillman Scholarship
Strzelczyk Family Scholarship
Clare Scherf Sweetman Scholarship
Raymond H. and Jane K. Taylor Scholarship
Jerline E. Walfoort Memorial Scholarship
Barbara E. Wehr Fund
Harmony Weissbach Scholarship
Martha and Frances Wheelock Scholarship
James G. and Ethel M. Barber Professorship of Theatre and Drama
T. A. Chapman Professorship in Music
Alice G. Chapman Professorship in Physics
Alice G. Chapman Librarianship
Milwaukee-Downer College and College Endowment Association Professorship

Angela Small Fry Intia, 2019
Maurine Campbell Scholarship

"Thanks to the Maurine Campbell scholarship, I have been able to attend the amazing school that is Lawrence University. With the help from this scholarship, I have been able to pursue my dream career in chemistry working with the outstanding and extremely helpful faculty here. Even outside of chemistry I take the time for exploration into my interests and want to give back through my work as a resident life advisor, stock room assistant, and student supervisor at Bon Appetit. Everything I have learned here, academically or not has forever molded the person I am today."

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