|
Planned Giving
Bargain Sales
A
bargain sale occurs when a donor sells property to Southern
Coos Health Foundation 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
Market Value |
=
Reportable Gain |
| $100,000
- $25,000 x
|
$25,000
$100,000 |
=
$18,750 |
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.
|
