Gift Opportunities with Vacation Property

For friends who own vacation property – a cottage by the lake or a condo on the seacoast, for example – some special gift planning opportunities are possible. A vacation home that is used only part of the year is an excellent choice for a tax-advantaged charitable contribution. Consider the case of Jeanne, who owns a vacation home that she and her family use primarily in the summer months. Jeanne can contribute what lawyers call an “undivided fractional interest” in the summer home. For example, she might contribute a 25% interest in the property – making us sort of a partner in owning the home. In theory, we would have the right to use the property one-fourth of the year, but our real benefit would come when the property eventually is sold – probably after Jeanne's death. At that point the we would be entitled to 25% of the proceeds.

What are the advantages to Jeanne? She would be entitled to a charitable gift deduction of roughly 25% of the value of the vacation home. The gift could mean substantial income tax savings and nothing really changes in her life. She and her family continue to use the vacation home exactly as before. But Jeanne also has the satisfaction of making an important gift.

Andrew owns an A-frame mountain lodge in a resort area. He planned to leave the lodge to us at his death as a memorial to his late parents. His advisers have pointed out that he can make the gift now, qualify for an income tax deduction, and enjoy the lodge for the rest of his life. It's called giving a “remainder interest” and keeping a “life estate” and has the same end result as a will: a gift when Andrew dies. But Andrew gains an important charitable gift deduction today, based on his current age (70). Deductions are particularly high in these times of low interest rates, and Andrew could deduct about $200,000, assuming the house is worth $350,000 and the lot is worth $50,000.

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