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 Goodwill Industries-Suncoast, 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 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.
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
| = Reportable
|$100,000 - $25,000
| = $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.
Return to the Legacy Giving home page or to the Quick Guide to Legacy Gifts.