Donating Borrowed Funds - Tax Effects

[mushroom51]

What is the name of your state (only U.S. law)? Michigan.
What are the tax effects of donating borrowed money secured by real estate. Simply put, If I am an owner/user of real estate and borrow money against it and donate the proceeds to a non-profit organization, where does that leave me tax wise. I know that the loan proceeds are not taxable. I know that the mortgage interest is deductible (for now). Are the donated funds deductible in whole or only as the proceeds are repaid.

 

[FlyingRon]

If you mean you got a check from the lender and donated the money to the charity, it is deductible (to the same extent any other charitable deduction would be) to you in the year you make it.

 

[justalayman]

and whether the interest is deductible or not necessarily be deductible. I presume the property is being used in a manner that would allow you to deduct the interest in some manner by your statements though.

the fact the money was borrowed is irrelevant as far as the donation goes. They are two completely separate issues. One is your donation. The other is your mortgaging of the property.

 

[tranquility]

In a money out refinance, only $100K will be deductible. (Assuming the money is not used to improve the home and you don't already have non-purchase money in the home equity financing.)

Also, because this will be non-purchase money, the Home Mortgage Forgiveness Act will not protect you from income if the loan is not repaid.

 

[mushroom51]

But wait...there's more!!. Suppose that I am also a non-profit. The other non-profit (which is totally unrelated) has agreed to occupy a portion of my premises in an arms length transaction as their operational offices. In return they will be making regular donations back to my non-profit in lieu of paying rent. Where,if any, is the tax liability?

 

[tranquility]

It was clear from the original question there is going to be some type of scheme in an attempt to game the system. I pointed out why you will have responsibility for the money no matter if you think there is a way through the responsibility shoals.

However, to the statement:

In return they will be making regular donations back to my non-profit in lieu of paying rent.

That's called "rent" and the "non-profit" will have to pay taxes on it.

 

[mushroom51]

And therefore will disqualify it as a non-profit since they would be receiving "rent"?

 

[justalayman]

But wait...there's more!!.

but wait!!

 

[justalayman]

And therefore will disqualify it as a non-profit since they would be receiving "rent"?

where do you get that?

 

[justalayman]

but wait!!

 

[tranquility]

And therefore will disqualify it as a non-profit since they would be receiving "rent"?

No. It's just that rent in this situation is UBI. (Look it up.)

 

[mushroom51]

Undisclosed Business Income is only UBI as long as it is undisclosed. I am only asking what and where the tax liabilities are in an ALT (look it up) between two non-profit organizations. BTW this is commercial - not residential real estate.

 

[davew128]

Undisclosed Business Income is only UBI as long as it is undisclosed. I am only asking what and where the tax liabilities are in an ALT (look it up) between two non-profit organizations. BTW this is commercial - not residential real estate.

UBI /= Undisclosed business income. (look it up)

 

[tranquility]

Apparently, you didn't look it up. But, if you are sophisticated enough to be using an Approximate Liquidity Target model as a non-profit financial management tool, you should probably have the Unrelated Business Income rules for non-profits down pat.

 

[LdiJ]

UBI /= Undisclosed business income. (look it up)

Its actually Unrelated Business Income.
From irs.gov:

Unrelated Business Income Defined

For most organizations, an activity is an unrelated business (and subject to unrelated business income tax) if it meets three requirements:

It is a trade or business,
It is regularly carried on, and
It is not substantially related to furthering the exempt purpose of the organization.