Q: How can an UPREIT be beneficial for gifting real estate to charities?

A: An UPREIT is clearly the most optimal structure for charitable donations of real estate, offering significant tax benefits, flexibility, and reduced complexity for both the donor and the recipient organization. Here’s why using an UPREIT is especially advantageous:

1. Maximizing Fair Market Value Deduction Without Depreciation Recapture or Capital Gains

One of the greatest advantages of donating through an UPREIT is the ability to receive a charitable deduction based on the fair market value (FMV) of the shares—without triggering depreciation recapture or capital gains taxes, which would apply in an outright sale. This FMV deduction can sometimes even exceed the value of the property itself, especially if the UPREIT shares have appreciated in value. By avoiding capital gains and depreciation recapture taxes, the donor achieves a more efficient charitable contribution, ensuring that the donation has maximum financial impact for both the donor and the charity (though see #5 regarding properties with high debt).

2. Fractional Shares for Multi-Charity Donations

One unique advantage of an UPREIT is the ability to donate fractional shares, enabling a donor to distribute the value of a single property across multiple charities (or family members, for that matter). This approach offers donors a level of flexibility unavailable with direct property donations, allowing them to support several causes from a single asset. Charities, in turn, have full control over their shares and can decide whether to hold for dividend income or sell based on their specific financial needs.

3. UBIT-Free Holdings for Nonprofits

Not-for-profit organizations often face tax complications when they hold real estate. Traditional property ownership can generate Unrelated Business Income Tax (UBIT) due to debt-financed income, which reduces the nonprofit’s overall benefit. The REIT structure, however, is considered a UBIT-blocker, that is, charities can hold REIT shares without triggering UBIT. This allows nonprofits to enjoy steady dividend income from the shares without the burden of additional taxes, making the shares an ideal vehicle for charitable donations.

4. Avoiding Operational Challenges of Real Estate Ownership

Holding real estate directly can be resource-intensive for nonprofits, requiring management, upkeep, legal compliance, and potentially capital calls. UPREIT shares spare nonprofits these operational burdens and cash flow issues. The organization can receive, hold, and manage shares just like any other investment, freeing it from property-specific responsibilities. This way, the charity can focus on its mission rather than on managing real estate.

5. Managing Low-Basis and High-Debt Real Estate

For donors with low-basis, high-debt real estate, gifting the property directly can be tricky and potentially costly. If the property’s debt exceeds the donor’s basis, donating it can trigger a taxable gain equal to the difference, which serves to reduce—but usually not eliminate—the tax benefit. While this gain may reduce the donor's overall tax savings, an UPREIT can still offer a more efficient path by converting the property into shares and manage the amount of gain triggered in a given year.