A charitable remainder trust is an irrevocable trust that lets you donate real estate — or other appreciated property — to your church while keeping an income stream from that property for a set term of years or for life. You, or another beneficiary you name, receive regular payments from the trust; your church receives whatever is left when the trust ends; and you claim a partial charitable income tax deduction in the year you fund the trust, based on the present value of what the church will eventually receive.
Real estate is one of the most common assets used to fund a charitable remainder trust, because it converts an illiquid, often highly appreciated property into current income and a current deduction without triggering a taxable sale in your own hands first. Done correctly, the trust — not you — sells the property, and a properly structured charitable remainder trust generally pays no federal income tax on that sale.
Done incorrectly, several rules described below can disqualify the trust as a charitable remainder trust, eliminate the deduction, trigger a 100% excise tax on unrelated business income, or result in self-dealing penalties — and real estate is where most of the mistakes happen, because a mortgage or a signed purchase agreement can undo the entire structure.
The Two Ways a Charitable Remainder Trust Can Pay You
- Charitable Remainder Annuity Trust (CRAT) — pays a fixed dollar amount every year, set when the trust is funded. No additional contributions are allowed after the initial transfer — if you want to add more real estate later, you need a new trust.
- Charitable Remainder Unitrust (CRUT) — pays a fixed percentage of the trust’s value, revalued every year, so payments rise and fall with the trust’s investment performance. Unlike a CRAT, a CRUT can accept additional contributions in later years.
The Federal Thresholds Every Real Estate Gift Must Clear
Under 26 U.S.C. § 664, both trust types have to satisfy the same three numeric tests before the IRS will recognize the arrangement as a charitable remainder trust at all:
- The payout rate — must fall between 5% and 50% of the trust’s value, whether that value is fixed at funding (CRAT) or revalued annually (CRUT).
- The 10% minimum remainder test — requires that the present value of the remainder interest your church will receive be at least 10% of the net fair market value of the property you contribute, calculated using the IRS actuarial rate under § 7520 at the time you fund the trust.
- The term — can run for the life or lives of the named beneficiaries, or for a fixed term of up to 20 years, but not longer.
A payout percentage that is too high, a long fixed term, or a young income beneficiary can push the present value of your church’s remainder interest below 10% of the property’s value, and the trust then fails to qualify — this is a calculation your attorney or trustee should run before the deed is drafted, not after.
Mortgaged Property Is the Most Common Way This Fails
If the real estate you contribute is subject to a mortgage, the debt-financed portion of the property can generate unrelated business taxable income (UBTI) under 26 U.S.C. § 514. There is a narrow exception — both the mortgage and your holding period have to exceed five years, and a cash-out refinance resets that five-year clock for the new debt — but most mortgaged property donated to a trust will not clear it.
Before 2007, any UBTI in a charitable remainder trust caused the trust to lose its tax-exempt status entirely for that year. The rule since then, under § 664(c)(2), is a 100% excise tax on the UBTI itself — for practical purposes, still a deal-breaker for most donors. The cleanest solution is to pay off the mortgage before the property is transferred into the trust, not after.
The Sale Has to Happen After the Gift, Not Before
The IRS applies an assignment-of-income analysis to real estate charitable remainder trusts: if you already have a binding obligation to sell the property — a signed purchase agreement, satisfied contingencies, an active exchange contract — before you contribute it to the trust, the IRS can treat you as the one who sold the property and the trust as merely receiving the proceeds. That recharacterization eliminates the tax benefit of using the trust in the first place.
The practical guidance is straightforward: the trust has to exist, and the deed has to be delivered to the trustee, before any sale becomes practically certain — not after a buyer has been found and terms negotiated. An independent trustee, rather than you, should handle the marketing, negotiation, and closing of the sale once the property is in the trust.
Traps Specific to Closely Held Property and Related-Party Debt
S corporation stock cannot fund a charitable remainder trust — the trust is not a qualifying S corporation shareholder, and contributing the stock terminates the company’s S election on the spot, converting it to a C corporation with corporate-level tax exposure. An LLC that has itself elected S corporation tax treatment is treated the same way; a single-member LLC taxed as a disregarded entity is not, and can be contributed as if it were the underlying real property.
A related self-dealing problem arises if the trust assumes a mortgage you personally guaranteed, or if you placed that mortgage on the property within the preceding ten years — the IRS can treat relief of your personal liability as a sale between you and the trust, triggering the excise taxes that apply to self-dealing by a disqualified person.
What the Charitable Deduction Actually Requires
Real estate valued over $5,000 requires a qualified appraisal by a qualified, independent appraiser before you can claim the deduction — your church cannot serve as that appraiser. Form 8283 (Section B) is filed with your tax return, and the appraisal itself must be attached only if the claimed deduction exceeds $500,000.
Part V of Form 8283 is a donee acknowledgment signed by an official authorized to sign the receiving organization’s tax returns; it confirms receipt of the property, not agreement with the appraised value. The IRS instructions do not address who signs when the property goes to a charitable remainder trust, where the trustee takes title rather than the church, so settle that with your attorney before the return is filed.
The deduction itself is not the full value of the property — it is the present value of the remainder interest your church will eventually receive, computed using the IRS’s § 7520 rate at the time of the gift.
Where the Church’s Role Fits In
Your church is typically the remainder beneficiary of the trust, not its trustee. Administering a charitable remainder trust — filing Form 5227 every year, investing the trust assets, calculating and issuing payments — is specialized fiduciary work most churches are not staffed to take on, which is why an independent trustee (a bank, trust company, or professional individual trustee) usually holds that role instead.
It is also worth knowing that the property does not become church-owned, church-used property the moment the trust is funded — and does not qualify for your church’s own property tax exemption — until the trust actually terminates and title passes to the church. Until then, the property is owned by the trust, not the church, for property tax purposes as well as everything else; see Church Property Tax Exemptions for what qualifies once title does transfer.
Where to Start
A charitable remainder trust is one of several ways to give real estate to a church — a straightforward outright gift, a bargain sale, or a life estate deed can each make more sense depending on whether you need ongoing income, want to keep using the property, or simply want the deduction without the trust’s administrative overhead. Because the traps above span tax law, trust administration, and real estate title work at once, this is not a do-it-yourself document: coordinate the trust drafting, the property’s title and mortgage status, and the choice of trustee together, before any deed changes hands.
To discuss whether a charitable remainder trust or another structure fits your property and your church, contact Bushore Church Real Estate.
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Disclaimer: Every situation is different and particular facts may vary thereby changing or altering a possible course of action or conclusion. The information contained herein is intended to be general in nature as laws vary between federal, state, counties, and municipalities and therefore may not apply to any given matter. This information is not intended to be legal advice or relied upon as a legal opinion, course of action, accounting, tax or other professional service. You should consult the proper legal or professional advisor knowledgeable in the area that pertains to your particular situation.
