Giving Gifts of Partial Interests to Charity

In this post, I discuss gifts of partial interest to charity, the tax benefits they may provide, and how understanding them can help lower your tax bill.

*Photo by KaCey97078 is licensed under CC 2.0. *

In a previous post, I discussed some popular noncash gifts to charity and how they interact with the tax code. In this post, I will discuss a special type of noncash gift to charity: gifts of partial interests.

A gift of less than a person’s entire interest in a piece of property does not generally qualify for a tax deduction. There are, however, several exceptions to this general rule that can give rise to valuable estate-planning techniques.

Gifts of Partial Interest: Remainder Interest

Donations of a remainder interest can be deductible gifts of partial interests where the remainder interest is in a personal residence or farm. The allowable deduction in this case is the actuarial value of the remainder interest. In order to qualify, the property cannot be held in trust, and it must be held as a life estate with a remainder interest. In addition, no deduction is allowed if the property must be sold at the termination of the life estate.

Fractional Share of Every Substantial Interest

Other deductible gifts of partial interests include donations of an undivided interest that is a fractional or percentage share of every substantial interest or right that the donor has in the property. This gift must also extend over the entire estate term that the donor has. This description is not as opaque as it sounds.

What this means is that if the donor gives a portion of his or her interest in a property, the value of that portion is deductible. So, for example, if a donor held a property in fee simple absolute and donated a one-half undivided interest in the property to a charity, so that the charity became a cotenant, then the gift would be deductible. The donor’s interest and the donation are both fee simple absolutes, so they match in substantial interest and extend over the same term—in this case, indefinitely.

Gifts of different kinds or for different terms than the donor holds are not deductible gifts of partial interests. So, if the donor held a fee simple absolute and donated a life estate or fee simple determinable, then there would be no deduction available under this exception to the rule against gifts of partial interests.

As an addition note, a gift of possession or control of a piece of property for a specific portion of each year—such as the ability to use the property every Christmas—is a gift of an undivided interest and deductible. Art collectors often use this and similar exceptions to provide partial gifts of art—such as allowing museums to display their pieces for certain periods of time. The rules surrounding this deduction can be complex, and so you should consult with a competent attorney or tax advisor if you would like to take advantage of this tax provision.

Charitable Conservation Contribution

A qualified charitable conservation contribution is another exception to the general rule against gifts of partial interests. When a partial interest in property for conservation is donated, the deductible amount of the gift is determined by the reduction in value of the property the gift causes. A deduction is allowed for up to 50% of the contribution base and can be carried forward for fifteen years. Only a public charity may receive such a gift.

In order to qualify as a charitable conservation contribution, one of the following four objectives of the gift must be present:

1. To preserve the land for outdoor recreation or education of the public.
2. To protect a natural habitat.
3. To preserve space for scenic enjoyment of the general public.
4. To preserve a historically important land area.

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See Also:

Charitable Deductions

Noncash Gifts to Charity