Nonprofit Donation / Tax Deduction Plan

What is the name of your state? Texas

Hi, I'm involved in a small nonprofit, and we have a creative plan to build a new building.

The plan is to create a separate Limited Partnership that will buy the land and build the building. Members of our nonprofit and others, are encouraged to "invest" in the LP. The sole intent of the LP is to buy the land, build the building, let the property increase in value over 2 years, then donate the property to the nonprofit. The advantage is that all investors in the LP would achieve a greater tax deduction because their share of the donated property will be valued higher than their original investment. Say you invest $1000 in the LP. When the property is donated, your investment may have appreciated to a $1400 donation, for example. So you can claim a $1400 donation instead of $1000.

Anyone see any gaping holes in this plan?

Many potential problems. It is impossible to discuss much without more detail. First,

The sole intent of the LP is to buy the land, build the building, let the property increase in value over 2 years, then donate the property to the nonprofit.

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A basic principle of partnership taxation is that there is a business purpose. It is arguable as to whether you have a business purpose here which makes the entire plan fall apart.

Second depends on what you are donating the property to. If the non profit is certain private nonoperating foundations as described by Code Sec. 170(e)(1)(B)(ii), your deduction of appreciated property would be reduced by the potential long-term gain. Also, any recapture of depreciation would be ordinary income rather than a long term gain and you would need to reduce your appreciation deduction by that amount.

In addition, there is a three year period after donation where the organization must provide certification of certain things if it is sold, or the donator must recapture the tax benefits.

There are other issues as well. One might be the posibility of the property losing value in the interim. Another might be that, if you have an agreement you will gift something in two years, are you really in a partnership or a trust? If you can't change your mind, haven't you already gifted the money? See an attorney with experience in charitable trusts who can advise you further. There may be a way to do what you want as there is no inherently fraudulent aspect to your plan, because you are going to actually give the (hopefully appreciated) value to the charity. The true value of your donation is worth more and the code does allow the donation of appreciated property without having to cash it in first (hence suffering tax cost).