Advanced Underwriting Consultants

Question of the Day – June 23

Ask the Experts!

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  
Loan Amount $2,000,000
Basis allocated to the sale
($2,000,000/$4,000,000) x 3,000,000
– 1,500,000
Recognized gain $500,000
   
Gift Portion  
FMV of transferred property $4,000,000
Loan Amount -2,000,000
Gift Element $2,000,000

 

 

 

 

 

 

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.

Have a question for the professionals at AUC?  Feel welcome to submit it by email.  We may post your question and the answer as the question of the day.