Charitable Giving–For the Poor
Thursday, May 13th, 2010Author Tony DeMaio
Ever wonder why the charities and churches are against the “flat tax” or “fair tax”? Ever wonder why the “rich folk” establish “charitable foundations“? Ever wonder why the “rich folk” have huge charitable contributions? After all, they didn’t get rich by giving money away.
I alluded to the answers in another paper; I’ll try to elaborate herein.
As in most, if not all, other cases, the answer is simple–follow the money. To keep it simple, let us assume a 50% tax bracket (40% federal, 10% state).
I was talking to a colleague of mine several years ago. We were talking about taxes, in particular the capital gains tax. He told me that he was quite familiar with the capital gains tax. He said me he had purchased a house for $40,000 several years ago and had just sold it for $100,000. He paid $50,000 in taxes.
Since he had depreciated the house over many years, his new basis was $0.00 (zero–he had depreciated the house down to zero. His “profit” as far as IRS was concerned was $100,000 – $0.00 or $100,000. Being in the 50% tax bracket, he netted $50,000.
(You might note that when capital gains were half the rate of ordinary income, you took your losses in real estate as ordinary income, but you took your gains at half that rate. With an ordinary income tax rate of 50% and a capital gains tax rate of 25%, even if you broke even, you made a profit by means of the tax structure. When the drunk Packwood changed the tax laws so capital gains was taxed equally with ordinary income in the eighties, folks dumped their real estate and caused the recession and S & L crisis of the eighties.
I learned about this when I gave a “financial advisor” my Keough to invest. He dumped the whole thing into a real estate investment trust. It went broke investing in Texas real estate just before the eighties crash. I was supposed to make out because of the tax advantages. Unfortunately, in a Keough, there ARE NO tax advantages. That was my FIRST experience with “financial advisors”.)
I said, “Tom, you shouldn’t have sold it.”
He replied, “Tony, the neighborhood was turning, I didn’t want to keep it.”
I said, “Tom, I didn’t say you should keep it, I said you shouldn’t have sold it.”
He replied, “Tony, I didn’t want to do a 1031 exchange, I want out of the landlord business. I’m getting old.”
I said, “Tom, I didn’t say you should have done a 1031 exchange, I said you shouldn’t have sold it.”
He replied, “Tony, what ARE you saying?”
I said, “You should have GIVEN IT AWAY.”
He didn’t say anything; he just looked at me like I was crazy.
I said, “You should have given it to a charitable organization as a ‘charitable remainder trust’. You would have a lifetime interest in it and when you died, the charitable organization (church?) would get control of it. In the meantime, the charity would sell the house for $100,000 and put the money in, for example, a bond fund. They would pay no taxes since they are a charity. Since you have a lifetime interest in the property, they would send you the proceeds from the bond fund–probably about $10,000/yr.”
He said, “Then it would take me about 10 years to break even after paying the taxes on the $10,000/yr.”
I replied, “Not really. You see, you get to claim a $100,000 charitable contribution deduction immediately. Since you’re in the 50% tax bracket, you can shelter $100,000 of income from this year’s taxes immediately, though you may have to carry over some to next year. Thus you would “save” or “make” the entire $50,000 immediately. The money from the bond fund is pure gravy.”
He wet his pants right then and there–right in front of God and everybody.
You should consider the benefits of charitable giving. Imagine if my friend (perhaps he is now an ex-friend) Tom had the luxury of establishing his own foundation to which he could have “donated” his house. As a member of the board of directors (along with his wife and son), he would not only have a lifetime interest in the house, but would also control the house.
A professor donated his “books and papers” to the university where he taught. He had them appraised at $80,000. He maintained a “lifetime interest” in the books and kept them at his home (claiming the storage fees as a deduction).
A millionaire depreciated his yacht over several years, claiming the depreciation as a “business expense“. He then donated it to his “charitable foundation” and claimed the deduction. He then BOUGHT IT BACK FROM THE FOUNDATION.
As a matter of fact, I believe you may donate ANYTHING to a charitable organization, maintain a “lifetime interest” in it, use it the rest of your life, and claim a charitable deduction immediately.
Does this give you a different outlook on the “Ford Foundation” et al? Do you now understand what would happen to “charitable donations” if a “fair tax” or “flat tax” were implemented, and why charities are against it/them? Many charities have a special division to contact likely “contributors”.
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Desertrat says:
May 13th, 2010
10:28 am
In order to depreciate that house, it must have been a rental, correct? SFAIK you can’t depreciate your own residence.
So he had the tax advantage of the depreciation over the years of ownership. How much was that? He received income during those years; how much profit above maintenance? Add up the net income and the savings via reduced taxes from the depreciation. How much was that?
He bought the house for $40K and had 10K net free and clear in his hand after the smoke cleared. Why whine at 25% profit?
Folks really oughta look into a deal before sticking their money into it, and that includes the pertinent tax laws. Life is a learning experience–but some folks seem to ignore the need to learn. Shrug.
Tony says:
May 13th, 2010
12:42 pm
Desertrat
Wot youse seys has merit, BUT consider the following:
1. You can “look into” the laws and certainly should, but you have absolutely no defense against the gubbermint changing them–as they did in the eighties (when this occurred). Have you noticed how the gubbermint is now looking at the 401(k), 403(2), Keough, and 457 retirement plans? You have the money and they want it. Watch out!! Also, watch out for a falling stock market as folks prepare for the Bush (capital gains) tax cuts to expire next year and folks sell off.
2. I don’t know how long he had the place, but IRS looks askance at a depreciation rate larger than 10%; so let’s assume he had it ten years. While the total profit is 25%, the YEARLY PROFIT (compounded) is about two and a quarter percent. If you recomember the eighties, he could have done better in a CD–and avoided the hassles.
3. The point of the writing was to show how charitable giving is not for the benefit of the poor–”properly” used, it benefits the rich much more. The fact that he may have made some income during his ownership is irrelevant to the action he should have taken at the time of sale.
always,
tony
Desertrat says:
May 14th, 2010
11:13 am
I’ve had rather a lack of faith in government for quite a while. Back in the 1970s, the Sec/Ag, Earl Butz, told farmers, “Get big or get out.” Lots of them indeed got big. Next thing you know, Willie Nelson is doing FarmAid concerts.
Then in the ’80s, “Mr. Republican”, Bob Dole, was instrumental in giving us the Alternative Minimum Tax. I had to change the entire methodology of my micro-empire to cope with that. PITA.
For now, I have a fair amount in tax-free munis. The income is plenty good for my limited needs, but do you think I have infinite faith that “tax-free” is a permanent condition? With this pack of thieves in power? I stay prepared to jump, shift, change on a moment’s notice.
FWIW, I went through the rent-house thing, thirty years back. I did okay, but call it a learning experience.
‘Rat
Tony says:
May 14th, 2010
12:33 pm
Desertrat
1. re large farms
I find it “interesting” that (much like the tobacco farmers that they subsidize, then tax the product because it is harmful) the government wants “big farms” in order for efficiency, but continues to subsidize “small family farms”. I forget what the acreage is to be considered “small” in order to qualify for subsidies but the American farmer, being quite practical, simply formed several corporations, broke up his holdings and “leased them” to the various corporations, then partook of the subsidies. (P’haps I’ll send Mike a copy of a paper I wrote on subsidies.)
2. Re: Faith in gubbermint
In terms of “infinite faith” in the gubbermint, I’m reminded of a phrase from my youth. (YES, I was young once.)
STAY LOOSE
always,
tony
Desertrat says:
May 14th, 2010
2:58 pm
One of the better places to examine federal farm subsidy and size of acreage is in California’s irrigation areas of the Central Valley, where the water is supplied by the Bureau of Reclamation. IIRC, it’s 160 acres per farmer. So, the farmer, his wife, each kid: They each have title to 160 acres. El cheapo BuRec water from the Delta-Mendota Canal. I don’t know the details for irrigation water from the California Acqueduct; that’s a state deal. (I used to design and estimate the costs on such projects, but wasn’t involved in the sales end of the deal.)
Oldmanriver says:
May 15th, 2010
6:54 pm
Farm payments are capped at $250k per operator. yes anyone with a bit of sense can just put ground in different family members names.
Although either in the current bill or the upcoming one they are looking at doing away with that. Wont do any good. The reason that small farms have problems is because they are inefficient and cannot earn enough money to invest in their operation and to raise a family. When butz said get big or get out he was just describing the effects of inflation on farm operations. Each year the purchasing power of what you make goes down. In order to compensate a farm has to grow every year. This is just a fact of being in the business of producing any commodity. Its why people could raise a family off of 40 acres 60 years ago but now it takes 1000-1200 (corn)
Desertrat says:
May 16th, 2010
4:12 pm
Farmers and ranchers make up one of the few of productive groups who buy retail and sell wholesale. And farm/ranch produce never has kept up with inflation…
Still, “Get big!” was government advice, supported by the banksters. Fast forward and government advice encouraged buying over-priced houses via banksters making weird-format government-induced loans. Trouble is, there ain’t nobody doing HomeAid.
Suffice that my trust in government is between Slim and None, and Slim left town.
Tony says:
May 16th, 2010
5:43 pm
I’m slightly familiar with the silicon gulch area–Fremont in particular (across the bay).
Fremont used to be composed of many farms. The county assessor would come by and say, “This area is zoned for housing development. We are going to up your tax rate accordingly.” The farmer would protest and say, “My grandfather farmed this land, my father farmed this land, I am farming this land, and it is expected my son will farm this land. This is farmland.”
The assessor would point out the housing subdivision going up a mile or two away and say, “Nope, you’re gonna subdivide. Then he would raise the tax rate.
Given the new tax, the farmer could not afford to farm, so he subdivided the land. The tax assessor would then say, “See, I knew you were gonna subdivide.” and proceed to the next farm.
Fremont is now all housing.
always,
tony
Oldmanriver says:
May 17th, 2010
11:49 am
Tony,
yes thats a bit different situation than what we have in Illinois. Farmers prayed that a road or subdivision got their land. Typically the developers would 1031 and the farmer would end up with 3 times the land than he started out with. In fact its a problem as development is driving the price of farm ground up all over Illinois. The best thing that can happen to a farmer is if a developer wants his land. That farmer can now actually afford to farm. Now of course this is corn country and we are not growing the same type of things they grow in california, so its a different situation.
Oldmanriver says:
May 17th, 2010
12:00 pm
DesertRat,
yes you are right pretty much a manufactured farm crisis in the 80s. Earl Butz was a loudmouth idiot. We were going to feed the world. I remember everyone being all excited buying huge equipment, land etc etc. Then Jimmy Carter put an embargo on grain sales to the soviets. Which caused pretty much every country to take a long hard look at using the USA as their only source of food. The Japanese started investing in South American Ag big time after that. Realizing that we could not be trusted. All the banks were lending out based on net worth, no one cared about cash flow. Which when you get down to it was the cause of the current economic crisis. Lending people money for homes based on the fact that those homes were always going up in value. After the farm crisis ag banks were strictly cash flow lenders. Which is probably a big reason why the current crisis has not had much effect on the ag sector.
Desertrat says:
May 17th, 2010
5:59 pm
Around 1976 I was at lunch with some political bigwigs. There was some chit-chat about an upcoming seminar, “What can municipal government do to keep prime agricultural land from becoming residential development?”
I levitated, regained control, and pointed out that municipal governments were the direct cause of the change. As said above,
“The assessor would point out the housing subdivision going up a mile or two away and say, “Nope, you’re gonna subdivide. Then he would raise the tax rate.
Given the new tax, the farmer could not afford to farm, so he subdivided the land.”
Being politicians, they were slow to understand, but I finally got it through to them. Saved the cost of the seminar, anyway, as it was never held. Didn’t change municipal tax appraisals, though.
I went through that deal. I know first hand. My grandfather worked two fulltime jobs, 1937-1939 and paid cash for 150 acres outside Austin. $24 per acre. By the early 1970s, the school taxes were $35 per acre per year. The appraised value was around $6,000/acre. Well, you can make a helluva lot more money raising condos than cows. Messes up the deer hunting, though…
‘Rat
Desertrat says:
May 18th, 2010
9:59 am
This may be of interest when talking about charity, along with another essay at Wiskey & Gunpowder:
http://whiskeyandgunpowder.com/charity-and-the-real-root-of-poverty/
Tony says:
May 29th, 2010
4:09 pm
Desertrat,
youse might also look at:
http://whiskeyandgunpowder.com/please-dont-feed-the-animals/