Exceptions to the Partial Interest Rule

Generally, no charitable deduction is available for a gift of a partial interest [Code §170(f)(3)(A)].  For example, the owner of an office building is not entitled to a deduction for allowing charity rent-free use of space.  However, there are three exceptions that can apply to partial interest gifts of real estate.

Gifts of undivided interests in the donor’s entire interest [Code §170(f)(3)(B)(ii)] — A donor who owns commercial property that provides rental income could make charity the owner of an undivided interest – 25%, for example.  Charity would then be entitled to 25% of the annual net rental income and 25% of the sales proceeds when the property is eventually sold.  The donor would be entitled to a charitable deduction in the year of the gift.

Contributions of a remainder interest in a home or farm [Code §170(f)(3)(B)(i)] — A farmer could reserve a life estate in property transferred to charity and continue farming the land or renting it for income.  At the farmer’s death, the property would pass outside probate to charity.  This is also an option for testamentary gifts to charity.  For example, a homeowner could bequeath a home to charity while reserving a life estate for a sibling.  The sibling, who would be responsible for real estate taxes, maintenance and insurance on the home, could live there or rent it out for income.  An estate tax charitable deduction is available if the donor’s estate is subject to tax.  If the sibling and charity agree, the home could be sold, with the parties each receiving the actuarial value of their interests.

Conservation easements [Code §170(h)] — An easement over land for conservation purposes must be made in perpetuity, with the charity able to enforce the provisions.


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