Case Study: What You Can Do With Real Estate

Norm was approaching retirement; he had invested well in real estate and owned two pieces of commercial property located next to each other. One of his properties had a very low cost basis, while the other had a tax basis close to market value. These commercial properties netted him annual earnings of 3 percent.

The financial challenges. Norm wanted to escape the time-consuming demands of property management and desired to make a contribution to a local charitable organization, so he consulted his financial advisor.

The charitable solution. Working with his advisor and a representative of the charitable organization, Norm decided to use his property to fund a charitable remainder trust that would pay him a lifelong stream of income. There was just one problem: He could not fund the trust with real estate encumbered by a mortgage, and both parcels carried loans. The solution involved transferring the mortgage on the low-basis property to the second property and then transferring the now-unencumbered low-basis property to the trust.

Shortly afterwards, Norm sold the mortgaged real estate and the trustee sold the low-basis parcel. Both received the proceeds from their respective properties.

How You Can Benefit
Even though the property in the trust has been sold, Norm receives a distribution each year of 6 percent from the trust—double that parcel's original income during his lifetime. Other benefits from this transaction include:
  • A charitable income tax deduction for a portion of the real estate's value.
  • Elimination of up-front, long-term capital gains on the low-basis real estate used to fund the charitable remainder trust.
  • A reduction of possible future estate taxes.
After Norm's lifetime, the balance remaining in the trust is transferred to the charitable organization, helping to fulfill its mission.

For more information about how you can benefit from charitable strategies, please feel free to contact Jackie Peterson at 507-933-7543 or jpeters9@gustavus.edu.