Gifting of a remainder interest in a home.

• Author: Kosty, Lauren

One of the first decisions taxpayers must make when planning their estates is what to do with the principal home. With the changing and sometimes downtrodden real estate market, this can be a difficult and time-consuming task for heirs, particularly if they do not reside in the same state and have no desire to keep or maintain the home. Homes can be on the market for months or sometimes years depending on their location, condition, and asking price. Often, heirs need to sell the home within nine months to provide the liquidity to pay estate taxes and any final costs associated with administering the estate. They may have to absorb a large reduction in the sales price to expedite the sale. One solution is to have the taxpayer gift a remainder interest in the home to a qualified Sec. 501(c)(3) charity. Benefits to the taxpayer include (1) an income tax benefit for the charitable deduction of the remainder interest; (2) the value of the home will be out of the taxable estate; (3) the taxpayer can continue to reside in the home for the rest of his or her life; and (4) the taxpayer will relieve the heirs of the burden of selling the home.

Gifting a remainder interest requires the property ownership to be divided into two separate interests: a life estate and a remainder interest. A life estate gives the holder the power to retain ownership until death. If the taxpayer is married, the life estate can be structured to last until the second spouse's death. A remainder interest gives the holder the right to take ownership when the life estate has ended. The home will need to be appraised at the time of the gift to determine the value of both the life estate and the remainder interest. The IRS has published tables that are used to value the life interest in the property. The difference between the appraised value and the life interest is the remainder interest. This latter amount qualifies as a charitable deduction that the taxpayer could use to offset taxable income, subject to the limits for charitable contributions.

In determining the value of the charitable remainder interest for purposes of the deduction, straight-line depreciation is taken into account if the property is depreciable. However, for estate and gift tax purposes, the value of a charitable remainder interest is determined without taking depreciation into account. For a description and an example of how to determine the value of a charitable remainder interest in a personal residence...