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The professionals at Advanced Underwriting Consultants (AUC) answer the tax and technical questions posed by producers. Here’s the question of the day.
Question: My client wants to make a gift of property to a charitable remainder trust (CRT). The property is worth $4 million, has a $2 million loan against it, and the client’s basis in the property is $3 million. Can she make the gift?
Answer: Yes, although the tax benefits are severely affected by the loan, and there are some potential risks.
The contribution of debt-encumbered property to a charitable remainder trust is treated as part charitable gift, part taxable sale. Here’s how the numbers would work in this case:
|Tax on Sale Portion|
|Basis allocated to the sale
($2,000,000/$4,000,000) x 3,000,000
|FMV of transferred property||$4,000,000|
In this case, the taxpayer would pay capital gains tax on $500,000 of gain if she makes the gift.
In addition, depending on the details of the transaction, the IRS may consider the transaction as one creating debt-financed income. That determination would invalidate the charitable remainder trust.
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