Case: Rhea Jones, 75, lives in a beautiful coastal town in northern California.
Rhea's home occupies three magnificent acres of bluff property that
overlooks the crashing waves of the Pacific. Since her home sits just
steps away from the dramatic cliffs, Rhea frequently jokes to her friends
about her "living on the edge" lifestyle.
John, Rhea's husband of 50 years, built the custom home ten years
ago. It was truly the realization of a lifelong dream of John and Rhea.
Unfortunately, John passed away unexpectedly five years ago. Now, Rhea
lives alone in the large home. Nevertheless, Rhea is looking forward to
spending her remaining days in this lovely home. Not surprisingly, she
frequently plays host to her children, grandchildren and friends.
Rhea is an active philanthropist. In fact, she spends three days a week
volunteering with local charities. While very wealthy and philanthropic,
Rhea makes only modest yearly gifts. However, she intends to make a substantial
bequest upon her death. Specifically, Rhea plans on distributing her entire
estate to her children and grandchildren, except for her cliff-side home.
Rhea's will provides that the home passes to John and Rhea's favorite
charity upon her death. The home is worth $3 million.
However, at a recent estate planning presentation, Rhea discovered the
benefits of a gift of a remainder interest in a personal residence. In
particular, she liked the potential significant tax savings and the home's
avoidance of the probate process. Also, because the gift is irrevocable,
the local charity would recognize and honor Rhea for her generous gift
at the annual fund raising gala. Of course, Rhea would retain the right
to live in her home for the rest of her life, which is an absolute requirement
to any potential gift arrangement.
Question: Rhea is very excited about this gift arrangement, but she has many questions.
Before she commits to the gift plan, she wants to address several issues.
In order to compute the charitable income tax deduction, Rhea must apportion
the $3 million home value between the land and building value. How does
she do this? Are there some guidelines for this apportionment?
Solution: When calculating the charitable income tax deduction for a gift of a remainder
interest in a personal residence or farm, the overall value of the contributed
property must be divided between the land value (non-depreciable portion)
and the building value (depreciable portion). There is no simple default
rule for this division.
In some situations, the land value may far exceed the building value.
For example, in San Francisco the land value may represent 3/4 of the
overall property value and the building value may represent only 1/4 of
the overall value. Alternatively, in most of the nation, the land value
may represent only 1/4 of the overall property value and the building
value may represent 3/4 of the overall property value. Because no two
properties are identical, each situation is unique.
Fortunately, a qualified appraiser or other qualified professional may
provide such a determination. As a result, Rhea hires a qualified appraiser
to determine the land and building value apportionment. (In addition,
the qualified appraiser will determine the fair market value of the property.
See GiftLaw Pro Chapter 1.5.2 Form 8283 and Appraiser Qualifications.)
After a thorough review, the qualified appraiser calculates the land value
at $2 million and the building value at $1 million. This vital information
is passed along to Rhea's advisor. Consequently, she moves one step
closer to her gift planning goals.
Editor's Note: For gifts of a remainder interest in land only (i.e., no building), the
overall property value is entirely land value and, accordingly, the building
value is zero. On another note, some individuals use property tax records
for determining land and building values. However, the IRS could challenge
this alternative valuation. Therefore, individuals should consult qualified
counsel absent the written opinion of a qualified appraiser.
Living on the Edge, Part 2
Living on the Edge, Part 1
George's "UT to Green Gift Annuity" Conversion