A few years ago a client asked whether he should give an $18 million partnership interest to charity. The gift would have cost him $2.7 million in tax.

A few years ago a client asked whether he should give an $18 million partnership interest to charity. The gift would have cost him $2.7 million in tax.

Giving away an investment can create a tax bill even when the charity pays you nothing. It happens with partnership interests, and especially with real estate funds that borrow. The family sees an interest worth $18 million, assumes it can deduct $18 million and skip the gain, and forgets that its share of the fund's debt goes with the interest.

The law treats that debt as money received. A gift of property subject to a liability is a bargain sale - part sale, part gift - and for a partnership interest the donor's share of the partnership's liabilities is the sale price, whether or not the charity assumes a dollar of it. Basis is split between the two pieces in proportion to value, so only the sale's share of basis offsets the debt.

My client's interest carried a $9 million share of the fund's debt and no basis. The sale piece was $9 million of gain, about $2.7 million of tax. The gift piece was an $18 million deduction, worth about $5.4 million. The gift netted him $2.7 million. Selling for cash instead meant $27 million of gain, $7.8 million of tax and $10.2 million in his pocket. Giving it away did not avoid the tax. It traded $10 million of proceeds for a $2.7 million benefit and an $18 million gift - fine if that is what he wanted, a surprise if it was not.

The value on the investor statement, the outside tax basis and the share of liabilities are three different numbers, and a zero capital account is none of them. If the fund holds assets that produce ordinary income on sale, part of the gain changes character and part of the deduction disappears. The charity, meanwhile, inherits debt-financed property and the unrelated business income that may come with it.

So calculate the gift before anyone asks the charity to accept it - the donor's gain, the usable deduction and the charity's own tax, together. Then compare the interest with everything else the family could give. The best charitable asset is not necessarily the one with the lowest basis. For my client, a charitable remainder trust funded with the same interest paid him $28 million over twenty years, gave the charity $8.7 million and cost $2.2 million of tax in year one - against $10 million from a sale today, with nothing to charity.