Karl Hendricks
was a man with
the golden
touch.
Throughout his
life, it seemed
every investment
idea that he
touched turned
to gold. By far,
Karl was most
successful with
real estate
investments. It
was definitely
his passion.
Amazingly, Karl
continued to buy
and sell real
estate at the
age of 85. For
instance, about
three months
ago, Karl
discovered a
great investment
property. It was
a "fixer-upper"
commercial
building in a
great area.
While other
nearby buildings
sold for over $2
million, the
seller needed to
sell quickly and
was asking just
$1 million.
The condition of
the building
turned many
buyers away. It
was being sold
"as-is." But
Karl was not
deterred. He
could see great
potential with
the building and
knew it would
not take much to
get it to market
condition.
Therefore, Karl
swooped in,
bought the
building for $1
million and
instantly hired
contractors to
refurbish the
place.
After three
months of hard
work
refurbishing the
building, the
place looked
like new! In the
end, Karl
invested
$250,000 in the
building
bringing his
total investment
in the property
to $1.25
million. One
month after the
completion of
the work, Karl
was contacted
informally by a
company that
expressed an
interest in the
building - a $2
million
interest! This
was no surprise
to Karl. He knew
the building was
another great
buy.
After Karl
learned about
the benefits of
a FLIP CRUT, he
eagerly wanted
to move forward.
(See Parts 1 and
2 for a full
discussion of
this decision.)
It looked like
the perfect
solution.
However, Karl
did still have
some important
questions.
Question
Karl wanted to
know what IRS
forms needed to
be filed in
order to
substantiate his
charitable
income tax
deduction. He
knew the IRS
would not just
"take his word
for it."
Solution
This is a very
important
question and,
accordingly, it
is crucial that
Karl follow the
valuation and
substantiation
rules closely.
In fact,
taxpayers may
lose their
charitable
income tax
deductions when
the required
forms are not
properly filed.
In this case,
Karl is making a
gift of
property,
i.e., the
building and
land. Therefore,
the critical
form for Karl's
situation is IRS
Form 8283.
The basic rule
states that if a
donor makes a
noncash
charitable
contribution
greater than
$500, Form 8283
must be included
with his or her
income tax
return. Karl's
property gift
easily surpasses
this $500
threshold, so he
must proceed to
file Form 8283.
The first
section of Form
8283 - Part A -
must include a
description of
the property.
For tangible
personal
property, this
description
should include
the general
condition of the
property. In
addition to the
description, if
there are any
restrictions or
reservations of
income, voting
rights,
acquisition
rights or limits
on use, those
should be
disclosed. For
example, all
charitable
remainder trust
interests must
be disclosed.
One method for
disclosure is to
append the
deduction
calculation to
Form 8283.
For gifts of
property over
$5,000 in value
($10,000 for
closely held
stock), Part B
of Form 8283
must also be
completed. Part
B is essentially
an appraisal
summary. Again,
Karl's property
gift also
exceeds the
$5,000 mark, so
he must complete
Part B as well.
There is an
exception to
this rule,
however, for
publicly traded
securities.
In particular,
Part B requires
that both the
appraiser and
the charitable
donee sign and
date Form 8283.
With a
charitable
remainder
unitrust or
annuity trust,
there may not be
a vested
charitable donee
as remainder
recipient.
Therefore, for
all unitrusts or
annuity trusts,
the CRT trustee
signs as the
charitable donee
on Part B of
Form 8283. In
this instance,
Karl is making a
gift to a FLIP
CRUT. Thus, the
trustee of the
FLIP CRUT will
sign Part B of
Form 8283.
The signature of
the charitable
donee or CRT
trustee is
merely to
acknowledge the
receipt of the
property. As
such, the
charitable donee
or CRT trustee
is making no
statement as to
the proper value
of the donated
property.
Lastly, Karl
must provide a
copy of Form
8283 to the
charitable donee
or, in this
case, the CRT
trustee.
Editor's Note:
In Part 11 of
this case study
series, we
addressed the
appraisal rules
and
qualifications
for an
appraiser.
