As a philanthropist, understanding capital gains taxes is an important part of your approach to charitable giving. You have a finite amount of money to give to the causes you care about most. Knowing how capital gains taxes work will help you maximize your giving in a tax-efficient way so you can have the greatest impact.
What Is Capital Gains Tax?
Capital gains tax is paid when an investor sells an asset and earns a profit. Assets can come in the form of stocks, bonds, cars, jewelry, real estate, NFTs and cryptocurrency, among other items.
For example, if you purchase a $1.5 million property in 2020, and sell that property for $2 million in 2023, you’ve achieved a capital gain of $500,000, which is considered taxable income.
For the majority of assets held longer than one year, the capital gains tax rate fluctuates anywhere between zero to 20 percent, depending on the amount of the gain. Other considerations that impact capital gains tax include how long the investor owned the asset,
the cost of owning that asset – including any fees that have been paid, the investor’s income tax bracket, and marital status.
Tax-efficient Ways to Manage Capital Gains Tax
The question many philanthropists ask is how to manage the tax impact of capital gains so they can give more to the causes they love. There are a number of approaches to counterbalance capital gains in order to better support the charitable organizations and a professional financial advisor can help you explore the approach that’s best for you.
Community Foundations are uniquely positioned to support tax-efficient giving through Donor Advised Funds as well as Charitable Special Assets Funds. Here’s a look at how each of these funds works to support your philanthropic goals.
Donor Advised Funds
A Donor Advised Fund, or DAF, is a fund held by a community foundation or other qualified sponsoring organization where a donor, or a committee appointed by the donor, may recommend eligible charitable recipients for grants from the fund. The foundation’s governing body must be free to accept or reject the recommendations.
A few of the benefits of a Donor Advised Funds include:
- Transferring assets of many kinds into the fund
- Receiving an immediate tax deduction when you establish the fund
- Donating the money to charities of your choice over time
- Having fewer receipts to itemize at tax time
At Rancho Santa Fe Foundation, we are proud to have a volunteer investment committee, made up of highly regarded investment professionals. Committee members have a track record of successful investment performance, are knowledgeable about the global economy, and devoted to stewarding donor assets with transparency and integrity.
The Foundation’s primary goals for the investment of the portfolio are to preserve capital with appropriate liquidity; sufficiently grow of capital to offset the effects of inflation and provide for future needs; and to realize the philanthropic goals of the Foundation and its constituent organizations.
Charitable Special Assets
Another path for philanthropists is to look at charitable special assets, which allow ‘special assets’ to be donated to charitable causes. Through Rancho Santa Fe Foundation’s Charitable Special Assets Fund (CSAF), philanthropists can contribute residential and commercial real estate, artwork, closely held stock, limited liability companies and partnerships and more.
The benefits of Charitable Special Assets Funds include:
- Reducing the transactional costs that would accompany selling the special asset yourself
- Having the Foundation as a resource to handle this complex sale and related paperwork
- Avoiding unnecessary complications and risks
- Maximizing the value of the asset being sold so you can grant more into the community
Rancho Santa Fe Foundation’s CSAF Board oversees a diligent, careful process that converts special assets into liquid assets on your behalf that can be contributed to charitable causes.
Smart, Simplified Giving
At Rancho Santa Fe Foundation, we believe in the power of smart philanthropy and following a thoughtful approach that maximizes impact. With a deep understanding of San Diego’s local needs, challenges, and opportunities, we guide philanthropists in making informed decisions about where contributions can be most impactful and how to give in a tax-efficient manner.
If you would like to explore tax-efficient giving through Donor Advised Funds or Charitable Special Assets Funds, get in touch with Amy Myers.