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Goal: Reduce capital gains on appreciated property
Benefit: Cash to pay off mortgage or other loans and charitable tax deduction for the gift portion
A bargain sale occurs when a donor sells property to Utah State University 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 is the gift portion. The charitable tax deduction 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 gains 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|
|$100,000 - $25,000 x||$25,000
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.
For more information or a confidential discussion of your charitable options, please email or call the General Manager, Peg Arnold, at (435) 797-3138.