Bargain Sales
A bargain sale occurs when a donor
sells property to Self Regional Healthcare for
less than the property’s fair market value.
The amount of fair market value over the sales
price is the donor’s charitable contribution,
which may be reduced by allocation of tax basis
and reduction rules relating to unrealized gain.
Almost any type of asset may be sold in a bargain
sale, depending on the cash available for purchase
and the suitability of the asset.
What are the advantages? The charitable
contribution portion qualifies for income tax
deduction. It may be carried forward for five
years if not fully usable in year of gift and
it allows the donor to receive some cash sales
proceeds while making a charitable gift. A bargain
sale may avoid capital gain tax liability on
highly appreciated property.
Elizabeth
and Ken had acquired some property as an investment
that they were renting out. Ken had always taken
care of the management and maintenance but since
he passed away, it had become a burden for Elizabeth.
As much as she enjoyed working in her backyard,
the idea of hiring and monitoring workers for
the rental property didn't appeal to her.
As a result, she asked her CPA about selling
it or perhaps giving it to her favorite charity.
Using it as a gift appealed to her except that
they still had a $125,000 mortgage on the property.
Her CPA did the calculations and found out that
a bargain sale allowing her enough to pay off
the mortgage and other closing costs would still
provide her with a generous income tax deduction
that would more than offset the capital gain
tax due.
"This was very much a win - win solution
for me. By making sure that the mortgage and
the selling costs were covered, I was free to
donate the property. I also was able to take
a burden off my shoulders and not have to worry
about all the details anymore. I get an income
tax deduction and I get to see the impact of
my gift today.
The capital gain portion of a
bargain sale is a little tricky. Even if the
donor proceeds are equal or less than the asset's
cost, there is an allocation of gain formula
that needs to account for the gain. Basically,
the market value minus the cost is multiplied
by the selling price divided by the market value.
For example, an art museum acquires a painting
worth $100,000 from a donor for the donor's
cost or $25,000. The reportable gain is then
calculated by subtracting cost basis ($25,000)
from market value ($100,000) which equals $75,000
and multiplying that times the selling price
($25,000) divided by the market value ($100,000)
or .25. The result is a gain of $18,750.
| Market
Value - Cost Basis
x |
Selling
Price = Reportable
Gain |
|
Market
Value |
| $100,000
- $25,000
x |
$25,000 = $18,750 |
|
$100,000 |
In this example, the donor will
report a long-term capital gain of $18,750 (assuming
a holding period that qualifies as long term)
and simultaneously has a federal income tax
deduction on the gift portion of the bargain
sale of $75,000.
Please note, individual
financial circumstances will vary. The information on this site does not
constitute legal or tax advice. Donor stories and photographs are for purposes
of illustration only. As with all tax and estate planning, please consult
your attorney or estate specialist. All material is copyrighted and is for
viewing purposes only. Use of this site signifies your agreement with the
terms of use. The content in this Planned Giving
section has been developed for Self Regional Healthcare by Future
Focus. Please report any problems to webmaster.
Revised: March 29, 2009 19:52 .