Oct 1, 2006 12:00 PM

, By Dan L. Daniels and David T. Leibell, partners, Cumming & Lockwood LLP, Stamford, Conn.

By Dan L. Daniels and David T. Leibell, partners, Cumming & Lockwood LLP, Stamford, Conn.

Real estate has been the fastest appreciating investment for many people during the past several years. With interest rates rising, however, recently there has been a softening of the real estate market in many parts of the country. Some economists feel that this may be the beginning of a long-term decline in real estate values. For those clients who believe that it's time to lock in some of their profits now, advisors need to be aware of the tax-efficient alternatives available for diversifying out of real estate. One is charitable planning. Structured properly, a charitable transfer of real estate can not only serve a client's philanthropic goals, but also provide significant tax benefits and, under the right circumstances, increased cash flow. Unfortunately, real estate transfers to charity raise a number of tax traps. So let's identify those tax traps and examine the best ways to structure charitable gifts of real estate.

Thetraps tax traps associated with charitable gifts of real estate are numerous and running afoul of one or more of them can result in significant negative tax consequences to the donor and, under certain circumstances, to the recipient charity as well. The most common traps are valuation and substantiation issues; prearranged sale; unrelated business taxable income; mortgaged property and the excise tax on self-dealing: