Can He Give Away His Home and Keep It, Too?
Harjeet, 72, a retired software engineer, enjoyed a successful career in the Bay Area's Silicon Valley. He now lives in a home large enough to welcome family and friends for long and short visits, renewing friendships and strengthening family ties.
However, the income he receives from his retirement plan and investments has kept him in a higher than expected tax bracket. His accountant, Bill, knows that Harjeet is generous to Hindu causes. He suggests that Harjeet consider a life estate agreement with the Hindu Heritage Endowment (HHE). "What is a life estate agreement?" Harjeet asks skeptically.
"It's a way for you to give away your home and keep it, too," Bill quips.
Harjeet shifts uncomfortably in his chair. "My home is the center of my social life. It's the place where I welcome family and friends."
"You would continue to live as you do now," Bill assures him. "You would enjoy your home exactly as before."
"What about the 'give away your home' part," Harjeet asks nervously.
That's the part that helps you lower your taxes," Bill says. "Here's how it works. You deed your home to HHE but retain the right to live there the rest of your life. That's it; nothing else changes. You continue to maintain the property, pay the property taxes, clean the leaves out of the gutters, and so on, as if nothing happened." "How does that help with my taxes?"
"The day you transfer title to HHE, you get a large charitable income tax deduction."
"For how much?"
"Let's say your home is worth $1.5 million, with two-thirds of the value attributed to the structure and one-third to the land. If you did this at age 72, you would receive a $943,279 charitable income tax deduction."
"Does that mean I will pay no taxes at all?"
"No. You get the full income tax deduction, but the IRS limits to 30% of your adjusted gross income the amount you can deduct in a given year. For example, if a donor had $100,000 of AGI, he could only lower his taxable income $30,000. The good news is the donor can carry over the unused portion of the deduction for five more years."
"You mean I have six years in all—the year of the gift and five carry-over years—to use the deduction?"
"That's right. Do you remember the years when you reduced your taxes by deducting your mortgage interest? This would give you similar tax relief for the next six years."
"And I get the use of my home the rest of my life?"
"That's right. You could do this with your home or your vacation home, as long as it's a personal residence. I recommend this strategy only to individuals who are very unlikely to need to sell their home. You're in that financial position. Plus, at your death, your home will go tax-free to HHE to support Hindu causes of your choice."
If this has some parallels to your circumstances, contact Shanmuganathaswami at 808-822-3012, extension 244 or firstname.lastname@example.org for your confidential charitable deduction tax calculation. Your property tax bill will show the proportion attributed to land and improvements, which is needed for the calculation. Mortgaged property calculations are based on the fair market value of the property at time of transfer less the amount remaining on the mortgage. Visit the HHE website at www.hheonline.org.