For charitably-inclined owners of OP units, donating the units can serve philanthropic goals while potentially offering tax advantages — but it's more complex than donating appreciated stock. Donating appreciated OP units (held long-term) to charity can potentially avoid the embedded deferred gain (which you'd otherwise recognize on a conversion or sale) while providing a charitable deduction. However, because OP units are partnership interests (not corporate stock), donating them raises complexities that donating stock doesn't — notably the charity's potential exposure to unrelated business taxable income (UBTI) from the partnership. So charitable giving with OP units requires careful planning, often using structures like charitable remainder trusts. This guide explains charitable giving with OP units, the complexities, the structures, and coordinating with your plan, with the strong caveat that this is highly technical and warrants experienced professional guidance.
Charitable giving with appreciated OP units
For charitably-inclined owners, OP units — like other appreciated assets — can be used for charitable giving. The general appeal of donating appreciated assets (rather than cash) is that you can potentially avoid recognizing the embedded gain (the charity, as a tax-exempt entity, may not face the same gain) while receiving a charitable deduction for the donation. So donating appreciated OP units could, in concept, support charity while avoiding the deferred gain you'd otherwise recognize.
This is conceptually similar to donating appreciated stock — a common charitable strategy where donating the appreciated stock (rather than selling it and donating cash) avoids the capital gains tax while providing a deduction. For OP units with a large embedded gain (the deferred gain from your 721 exchange), donating them could similarly avoid that gain while supporting charity.
However, OP units are partnership interests, not corporate stock, which makes donating them more complex than donating stock (discussed below). So while the concept (avoiding the gain, getting a deduction) is appealing, the execution with OP units has complexities. Charitable giving with appreciated OP units — potentially avoiding the embedded deferred gain while receiving a charitable deduction, conceptually like donating appreciated stock — is appealing for charitably-inclined owners, but OP units' partnership-interest nature adds complexity. The concept is attractive; the execution is complex. Understanding the concept sets up the complexities. Donating appreciated OP units can serve charitable goals while potentially avoiding the gain, but the partnership-interest nature requires careful handling.
Avoiding the embedded gain
A key potential benefit of donating appreciated OP units is avoiding the embedded deferred gain. Recall that your OP units carry a deferred gain (the gain you deferred in the 721 exchange, plus appreciation) — which you'd recognize if you converted or sold the units. Donating the units to charity, rather than converting/selling them, could avoid your recognizing that gain (the charity receives the units, and the gain isn't triggered for you in the same way).
So donating the units could let you support charity with the units' full value while not paying the tax on the embedded gain that a sale would trigger. Combined with a charitable deduction (for the donation's value, subject to the deduction rules for the asset type), this can be tax-efficient for charitable giving. So the gain-avoidance plus the deduction are the potential tax benefits.
However, the specifics of how the gain is treated, and the deduction rules for donating a partnership interest, are technical (and differ from donating stock) — so the exact tax outcome depends on the details, handled by your tax advisors. So avoiding the gain is a potential benefit, but the specifics require professional analysis. Avoiding the embedded gain — donating the OP units to charity potentially avoiding your recognition of the deferred gain (which a sale would trigger), plus a charitable deduction — is a key potential tax benefit, though the specifics for partnership interests are technical. The gain-avoidance and deduction are appealing. Understanding the gain-avoidance benefit shows the tax appeal. Donating OP units could avoid the embedded gain while providing a deduction, but the partnership-interest specifics require professional analysis.
Donating appreciated OP units could avoid recognizing the embedded deferred gain (which a sale would trigger) while providing a charitable deduction — but the partnership-interest specifics are technical.
The partnership-interest complexity (UBTI)
The key complication in donating OP units is that they're partnership interests, which raises issues that donating stock doesn't — notably unrelated business taxable income (UBTI). When a tax-exempt charity holds a partnership interest (like OP units), the partnership's income can flow through to the charity as UBTI — income on which even a tax-exempt charity may owe tax (because it's from an unrelated business or debt-financed property). So a charity receiving OP units could face UBTI from the partnership's income (especially if the partnership has debt-financed property, common in real estate).
This UBTI exposure makes charities potentially reluctant to accept OP units (partnership interests) directly, or it complicates the gift. Donating corporate stock doesn't create this issue (dividends and gains on stock aren't UBTI in the same way), but donating a partnership interest can. So the partnership-interest nature of OP units is the central complexity in donating them.
Because of the UBTI issue (and other partnership-interest complexities), donating OP units directly to a charity is more complicated than donating stock, and may require specific structures or considerations. So the UBTI complexity is the key reason donating OP units requires careful planning. The partnership-interest complexity (UBTI) — OP units being partnership interests whose income can flow to a charity as taxable UBTI (especially with debt-financed property), making charities potentially reluctant to accept them directly — is the central complication in donating OP units. The UBTI issue distinguishes OP units from stock. Understanding the UBTI complexity shows why donating OP units is complex. The UBTI exposure from OP units' partnership-interest nature is the key complexity in charitable giving with them, requiring careful structuring.
Charitable remainder trusts
One structure sometimes used for charitable giving with appreciated assets is a charitable remainder trust (CRT). A CRT is an irrevocable trust into which you contribute appreciated assets; the trust pays you (or beneficiaries) an income stream for a term, and the remainder goes to charity. Contributing appreciated assets to a CRT can defer or avoid the gain (the CRT, as a tax-exempt trust, can sell the assets without immediate gain), provide an income stream, and give a charitable deduction (for the remainder's value).
For OP units, a CRT might be considered as a structure for charitable giving, potentially addressing some of the complexities (the trust holding the units, managing the income). However, the UBTI and partnership-interest issues still require careful handling even within a CRT (a CRT holding a partnership interest can face UBTI issues, which can have significant consequences for the CRT). So a CRT is a possible structure but doesn't eliminate the partnership-interest complexities.
Whether a CRT (or another structure) is appropriate for donating OP units depends on your charitable and financial goals and the specific complexities, requiring sophisticated estate and tax planning. So CRTs are one possible approach, with their own considerations. Charitable remainder trusts — a structure for charitable giving with appreciated assets (deferring the gain, providing income and a deduction) that might be considered for OP units, though the UBTI and partnership-interest issues still require careful handling — are one possible approach for donating OP units. CRTs offer benefits but don't eliminate the complexities. Understanding CRTs shows a possible structure. A charitable remainder trust is one structure for charitable giving with OP units, but the partnership-interest complexities (UBTI) require careful planning even within it.
Donor-advised funds and direct gifts
Other charitable vehicles — donor-advised funds (DAFs) and direct gifts — may also be considered for OP units, with the same partnership-interest caveats. A donor-advised fund is an account at a sponsoring charity into which you contribute assets (getting a deduction), then recommend grants to charities over time. Contributing appreciated assets to a DAF can avoid the gain and provide a deduction. But a DAF accepting OP units (partnership interests) faces the same UBTI and complexity issues, so DAFs may be reluctant to accept them, or it requires special handling.
Direct gifts of OP units to a charity (giving the units directly) face the UBTI and partnership-interest issues most directly — the charity must be willing to accept the units and handle the UBTI. So direct gifts are the most exposed to the complexities, and many charities may not accept OP units directly.
So whether a DAF, direct gift, CRT, or another approach works depends on the charity's willingness and the handling of the complexities. In practice, donating OP units (partnership interests) often requires finding a charity or structure that can handle the partnership interest, which is more involved than donating stock. Donor-advised funds and direct gifts — possible charitable vehicles for OP units, but facing the same UBTI and partnership-interest complexities (with charities potentially reluctant to accept them) — are alternatives to a CRT, with the same caveats. The vehicle must handle the partnership interest. Understanding these options shows the range of approaches, all subject to the complexities. DAFs, direct gifts, and CRTs are possible vehicles for donating OP units, but all face the partnership-interest complexities, requiring a charity or structure that can handle them.
- Donating appreciated OP units can potentially avoid the embedded gain while providing a charitable deduction — appealing for charitable giving.
- But OP units are partnership interests, so donating them raises complexities (notably UBTI) that donating stock doesn't.
- Structures like charitable remainder trusts, donor-advised funds, or direct gifts may be used, but all face the partnership-interest/UBTI issues.
- Charitable giving with OP units is highly technical, requiring experienced tax and estate professionals — don't attempt it without them.
Coordinating with your plan
Because charitable giving with OP units is complex, coordinating it with your overall estate, tax, and charitable plan, with experienced professionals, is essential. The decision to donate OP units (and how) should fit within your broader plan — your charitable goals, your estate plan, your income needs, and your tax situation. So the charitable gift is one component of a comprehensive plan.
The professionals involved should include an experienced estate attorney (for the structures and estate integration), a CPA (for the tax analysis, including the UBTI and gain treatment), and possibly a charitable-giving specialist. Their expertise is essential given the partnership-interest complexities — this isn't a do-it-yourself charitable gift. So assembling the right professional team is key.
The plan should weigh whether donating OP units (vs. other assets, or converting and donating cash) best achieves your charitable and tax goals, given the complexities. In some cases, other assets might be simpler to donate, with the OP units held for other purposes (income, the step-up). So coordinating the plan involves weighing the options with professionals. Coordinating with your plan — integrating the charitable gift of OP units into your overall estate, tax, and charitable plan, with experienced professionals (estate attorney, CPA, charitable specialist), weighing whether donating OP units best achieves your goals given the complexities — is essential. The gift must fit your comprehensive plan. Understanding the need to coordinate ensures the gift is well-planned. Charitable giving with OP units must be coordinated within your overall plan, with experienced professionals, given its complexity.
How Baker 1031 helps with charitable considerations
Baker 1031 Investments helps OP unit holders consider charitable giving as part of their planning — explaining the potential benefits (avoiding the gain, the deduction), the partnership-interest complexities (UBTI), and the possible structures (CRTs, DAFs, direct gifts), and coordinating with your estate attorney, CPA, and charitable advisors. We help you understand whether and how charitable giving with your OP units fits your plan.
REIT units and related securities are offered through the broker-dealer, Aurora Securities, Inc. (member FINRA/SIPC), and any recommendation follows a suitability review. We don't provide tax, legal, or charitable-planning advice (your estate attorney, CPA, and charitable advisors handle the structures, tax, and execution); we help you understand the considerations and coordinate with your professionals. Our role is to help you understand the charitable-giving possibilities and complexities for your OP units — so if charitable giving is a goal, you explore it knowledgeably with the experienced professionals it requires. Charitable giving with OP units is highly technical, and we help you understand the considerations while emphasizing the essential role of your tax and estate professionals, who handle the sophisticated planning this requires.
Frequently Asked Questions
Can I donate OP units to charity?
Potentially, but it's complex. Donating appreciated OP units could avoid the embedded deferred gain (which a sale would trigger) while providing a charitable deduction — appealing for charitable giving. However, OP units are partnership interests (not corporate stock), so donating them raises complexities that donating stock doesn't, notably unrelated business taxable income (UBTI) for the charity. So while donating OP units is conceptually possible and potentially tax-efficient, it requires careful planning and experienced professionals, given the partnership-interest complexities. It's not as simple as donating appreciated stock.
What's the benefit of donating OP units versus selling?
Donating appreciated OP units could avoid your recognizing the embedded deferred gain (which converting/selling them would trigger) while providing a charitable deduction — so you support charity with the units' value without paying the tax on the gain a sale would trigger. This is conceptually like donating appreciated stock (avoiding the capital gains tax while getting a deduction). So the benefit is gain-avoidance plus the deduction. However, the specifics for partnership interests are technical, and the UBTI complexity must be handled, so the exact benefit depends on the details and professional structuring.
What is UBTI and why does it matter for OP units?
Unrelated business taxable income — income on which even a tax-exempt charity may owe tax (from an unrelated business or debt-financed property). When a charity holds a partnership interest (like OP units), the partnership's income can flow to the charity as UBTI, especially if the partnership has debt-financed real estate (common). So a charity receiving OP units could face UBTI, making charities potentially reluctant to accept them. Donating corporate stock doesn't create this issue, but donating a partnership interest (OP units) can. UBTI is the central complexity in donating OP units, requiring careful handling.
Will a charity accept my OP units?
It depends — because of the UBTI and partnership-interest complexities, many charities may be reluctant to accept OP units directly (partnership interests can create UBTI and administrative burdens). Some charities or structures may be willing and able to handle them, but it's more involved than donating stock (which charities readily accept). So you may need to find a charity or structure (like a CRT) that can handle the partnership interest, or consider donating other assets instead. The charity's willingness to accept OP units is a key practical consideration, often requiring special arrangements given the complexities.
What is a charitable remainder trust (CRT)?
An irrevocable trust into which you contribute appreciated assets; the trust pays you (or beneficiaries) an income stream for a term, and the remainder goes to charity. Contributing appreciated assets to a CRT can defer or avoid the gain (the CRT, as tax-exempt, can sell without immediate gain), provide income, and give a charitable deduction (for the remainder). A CRT might be considered for OP units, but the UBTI and partnership-interest issues still require careful handling (a CRT holding a partnership interest can face UBTI with significant consequences). So a CRT is a possible structure, but it doesn't eliminate the complexities.
Can I use a donor-advised fund for OP units?
Possibly, but with the same caveats — a donor-advised fund (DAF) lets you contribute assets (getting a deduction) and recommend grants over time. Contributing appreciated assets to a DAF can avoid the gain and provide a deduction. But a DAF accepting OP units (partnership interests) faces the same UBTI and complexity issues, so DAFs may be reluctant to accept them, or it requires special handling. So a DAF is a possible vehicle, but the partnership-interest complexities apply. Check whether the DAF can accept and handle OP units, which many may not, given the UBTI and administrative issues.
Is donating OP units like donating stock?
Conceptually similar (both can avoid the gain and provide a deduction), but practically more complex. Donating appreciated stock is clean — charities readily accept it, and it doesn't create UBTI. Donating OP units (partnership interests) raises UBTI and other complexities, making charities potentially reluctant and requiring careful structuring. So while the tax concept is similar, the execution with OP units is much more involved than with stock. If you want simple charitable giving, donating other appreciated assets (like stock) may be easier than OP units. The partnership-interest nature makes OP units a more complex charitable gift than stock.
Should I donate OP units or other assets to charity?
It depends, but in many cases donating other assets (like appreciated stock) may be simpler than OP units, given the partnership-interest complexities (UBTI, charity reluctance). You might donate simpler assets to charity and hold the OP units for other purposes (income, the step-up). However, if you specifically want to use the OP units for charity (e.g., to avoid their large embedded gain), it can be done with proper structuring. So weigh whether OP units or other assets better achieve your charitable and tax goals, considering the complexities — your advisors help you decide. Often, simpler assets are preferable for charitable gifts.
Do I need professionals to donate OP units?
Absolutely — charitable giving with OP units is highly technical (the partnership-interest nature, UBTI, the structures, the gain and deduction treatment), so it requires experienced professionals: an estate attorney (for the structures and estate integration), a CPA (for the tax analysis), and possibly a charitable-giving specialist. This isn't a do-it-yourself charitable gift. The complexities (especially UBTI) can have significant consequences if mishandled, so professional guidance is essential. Don't attempt to donate OP units without experienced tax and estate professionals — the partnership-interest complexities demand their expertise.
How does Baker 1031 help with charitable giving?
We help you consider charitable giving as part of your planning — explaining the potential benefits (avoiding the gain, the deduction), the partnership-interest complexities (UBTI), and the possible structures (CRTs, DAFs, direct gifts), and coordinating with your estate attorney, CPA, and charitable advisors. REIT units are offered through the broker-dealer (Aurora Securities, member FINRA/SIPC) after a suitability review. We don't provide tax, legal, or charitable-planning advice (your professionals handle those); we help you understand the considerations and coordinate with your professionals, so if charitable giving is a goal, you explore it knowledgeably with the experienced professionals it requires.
Can I leave OP units to charity in my will?
Yes — you can bequeath OP units to a charity at death through your estate plan. A charitable bequest of OP units can support the charity and may provide an estate-tax charitable deduction (reducing your taxable estate). However, the charity receiving the units still faces the partnership-interest considerations (like UBTI), so the bequest should be structured with your estate attorney to address them (e.g., the charity's ability to handle the units, or converting them as part of the bequest). So leaving OP units to charity at death is possible and can be part of your estate plan, but the partnership-interest complexities apply, requiring careful structuring with your estate attorney.
Is donating during life or at death better for OP units?
It depends on your goals. Donating during life can provide an income-tax charitable deduction (and potentially avoid the gain), while bequeathing at death can provide an estate-tax deduction and lets you keep the units (and their income) during life. For OP units specifically, the partnership-interest complexities (UBTI) apply either way, so both require structuring. Some owners hold the units until death (for the income and the step-up for non-charitable heirs) and leave other assets to charity, or use a bequest. So whether lifetime or testamentary giving is better depends on your charitable, income, and estate goals, weighed with your advisors given the OP-unit complexities.
Could I use a charitable strategy to avoid the conversion tax?
Potentially, in concept — donating appreciated OP units (rather than converting and selling them) could avoid the conversion tax on the donated units (the charity, as tax-exempt, may not trigger your gain), while providing a deduction. So a charitable strategy could let you support charity with units you'd otherwise convert (and be taxed on), avoiding that tax. However, the partnership-interest complexities (UBTI, charity acceptance) must be handled, so it's not a simple way to avoid the conversion tax — it requires the charitable intent and proper structuring. So if you're charitably inclined, donating units can avoid the conversion tax on those units, but it's a charitable strategy (you give the value away), not just a tax play.
Glossary
- Charitable Giving
- Donating assets (like OP units) to charity, with potential tax benefits.
- Appreciated Asset
- An asset with embedded gain, like OP units, used for giving.
- Embedded Gain
- The deferred gain in OP units, potentially avoided by donating.
- Charitable Deduction
- The tax deduction for a charitable donation.
- Partnership Interest
- What OP units are, adding complexity to donating them.
- UBTI
- Unrelated business taxable income, a charity's tax from a partnership interest.
- Debt-Financed Property
- Real estate with debt, a source of UBTI for charities.
- Charitable Remainder Trust (CRT)
- A trust providing income and a charitable remainder.
- Donor-Advised Fund (DAF)
- A charitable account for contributions and grants.
- Direct Gift
- Giving units directly to a charity, most exposed to the complexities.
- Tax-Exempt Charity
- The recipient, which may still owe UBTI tax on partnership income.
- Gain Avoidance
- Avoiding recognizing the gain by donating rather than selling.
- Income Stream
- The payments a CRT provides to the donor.
- Estate Integration
- Fitting the charitable gift into the estate plan.
- Charitable Specialist
- A professional advising on sophisticated charitable giving.
- Deduction Rules
- The rules governing the charitable deduction for the asset type.
Sources & References
- IRS. Publication 526, Charitable Contributions
- IRS. Publication 598, Tax on Unrelated Business Income of Exempt Organizations
- Cornell Legal Information Institute. 26 U.S. Code § 664 — Charitable remainder trusts
- Cornell Legal Information Institute. 26 U.S. Code § 721 — Nonrecognition of gain or loss on contribution
Disclosures
This article is published by Baker 1031 Investments, LLC for general educational purposes for accredited investors and is not an offer to sell or a solicitation of an offer to buy any security, nor is it tax, legal, accounting, or investment advice or a recommendation. Any securities offering is made solely through a sponsor’s private placement memorandum (PPM) following a suitability determination. Securities offered through Aurora Securities, Inc. (ASI), member FINRA / SIPC; Baker 1031 Investments is independent of ASI.
Oil & gas mineral and royalty interests and DST programs are speculative, illiquid securities sold only to verified accredited investors and involve substantial risk, including possible loss of principal, commodity-price and production-decline risk, lack of control, and the risk that an intended 1031 exchange fails to qualify for tax deferral. Whether a particular interest qualifies as like-kind real property is a fact-specific legal determination that varies by state and by the terms of the instrument. Tax results depend on your individual circumstances. Consult your own CPA and attorney before acting. Past performance does not guarantee future results.
