(1) Interest rates are beginning to rise – it may be time to “cash in” some real estate gains
The Federal Reserve Board has raised interest rates three times over the past few months. In recent years, low interest rates have helped fuel record growth in new home construction and real estate investments. But, if interest rates continue to rise, gains on property investments may reverse course. Tougaloo’s donors can “cash out” a portion of their investment gains in real estate in a number of ways, such as selling appreciated property (tax-free) in a charitable trust or by giving Tougaloo College a partial interest (e.g. 30%) in the property before the sale to help offset taxable gains on the interest they retain and sell (e.g. 70%). There are some costs when donating real estate – the property must be appraised for the donor’s tax deduction, an environmental review may be needed and a deed must be prepared – so most charitable gifts of real estate tend to be large enough for the donor to justify those costs.
(2) “Know thy tax rates” (or at least know when these will change in the future)
Unless Congress acts (and budget difficulties may discourage further tax cuts) – (a) the tax on dividends increases from 15% back to the ordinary income tax rate (currently as high as 35%) in 2009; (b) the tax rate applied to most capital gains increases from 15% back to 20% in 2009 (gain on the sale of artwork or collectibles is still taxed at 28%); (c) beginning in January, 2006, the estate tax exemption will shelter up to $2 million of each person’s estate from taxes; (d) you can make “annual exclusion” gifts to as many people as you want of up to $11,000 per person and, in addition, you can give away up to $1 million during your life and it can be sheltered from gift tax (applies to non-charitable gifts). Gift and estate tax exemptions can also be “leveraged” through life income gifts for your loved ones.