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BARGAIN
SALES
A
bargain sale occurs when a donor sells property to
United Methodist Foundation, Inc. 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.
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