Would you like to make a donation of an appreciated asset such as real estate, tangible or intellectual property, business interests, or securities that cannot be readily divided and receive a cash payment in return? Consider a bargain sale.
As its name implies, a bargain sale is simply a sale of a portion of an asset to a charitable organization such as ours for less than its fair market value.
You receive an immediate cash payment (or a deferred payment, installment or life annuity payments if you desire) for the portion you sell and an immediate charitable income tax deduction for the remaining value.
Bargain sales offer superior income tax benefits when compared simply selling an asset and donating a portion of the proceeds because you avoid capital gains on the gift portion.
Planning Scenario: How a Bargain Sale Works
Suppose you would like to make a gift of $50,000 from the proceeds of the sale of appreciated real estate you own. The property is worth $100,000 and has an adjusted cost basis (Pop-up: Your adjusted cost basis is generally the amount you paid for the property (plus certain adjustments such as transaction costs and capital improvements, and less any claimed depreciation). If you received the property by gift from a living person, your take over their basis in the property. If you received the property by inheritance, your starting cost basis is most likely the fair market value of the property on the date of their death.of $50,000.
Sell, then Give. If you simply sell the property, you will realize a $50,000 long-term capital gain ($100,000 sales price minus your $50,000 basis). If you then donate $50,000 of the proceeds, you will receive a $50,000 charitable income tax deduction.
Bargain Sale. As an alternaive, if you sell 50% of the property to our organization for $50,000 and donate the remaining $50,000 to us, some interesting things happen.
Compare. Unlike a sale of the entire property, you will realize capital gain only on the portion you sell. In this case, $50,000 less your basis allocated to the sale portion of $25,000 results in your realizing a capital gain of only $25,000. That is $25,000 less than you would have realized if you had sold the entire property and donated a portion of the proceeds.
The reason for this simple: The tax law provides that you avoid capital gains (and losses) on assets you donate to charity as long as you donate them before they are sold. If you donate 50% of the property before selling it, you will avoid paying tax on the $25,000 capital gain attributable to that portion.
If you are in 25% combined federal and state capital gains tax bracket, you will save an additional $6,250 in taxes when compared to selling the entire property and donating a portion of the proceeds.
In addition, you will still receive a $50,000 charitable income tax deduction for the portion you give!
To review, bargain sales provide you with:
• an immediate cash (or, at your discretion, installment payments over time)
• an immediate charitable income tax deduction for the portion you give
• reduced capital gains
• relief from the management responsibilities of the donated property and accompanying expenses, and
• the satisfaction of making a substantial tax-efficient contribution to our mission and programs.
For further reading, see Q&As about Bargain Sales. Or contact us at ______________ and we would pleased to answer your questions.
(new page) Q&As about Bargain Sales
Q: What types of property can are suitable for a bargain sale?
Nearly any type of asset can can be sold via a bargain sale.These includes residential, commercial and unimproved real estate; tangible personal property such as rare coins and bullion, artwork, cars, jewelry or other collectibles, livestock, crops, timber; intellectual property such as copyrights, certain royalty interests, patents, installment obligations, cash value life insurance contracts, partnerships, limited liability companies, and stock in privately-held business; and even publicly-trade securities (e.g., one share of Berkshire Hathaway sells for in excess of $100,000 and can be sold via a bargain sale).
If you believe you own an asset that might be a good candidate for a bargain sale, please contact us and we would be pleased to discuss it with you.
Q: Does a bargain sale makes sense for property that would result in a tax loss if I sold it?
The short answer is no. Just as the tax rules provide that you do not realize any gain when you donate appreciated property to charity, neither do you realize any potential tax loss. Therefore, if your adjusted cost basis of an asset exceeds the fair market value of the property, you would probably be better off selling it and donating a portion of the proceeds. You will still receive a charitable deduction for the amount you donate and you may be able to claim a capital loss against a portion of your other taxable income and capital gains from the sale of other assets.
Q: What percentage of the property are you willing to purchase?
In order for the tax benefits of a bargain sale to be respected by the IRS, the rules state that you must establish the intent to make a charitable gift prior to the transaction. In other words, the gift portion should be significant; otherwise, the IRS might simply consider the sales price a discount and not allow any charitable deduction at all. The amount we might be willing to pay also depends on the type of property involved and other factors such as the size of the transaction, debt structure, and if we plan to hold the property for investment or use it in connection with our charitable purposes and programs. For example, if we intend to sell the property immediately, we might ask to discount the purchase price by the sales commission and expenses that you would have otherwise incurred if you sold the property yourself.
Q: I own stock in a privately-held corporation. Can make a bargain sale of my stock to your organization and then have my company redeem the shares?
The IRS approved this type of transaction via a private letter ruling. It is important to note the charity was not required to offer the shares for redemption and the company was not required to redeem them. In other words, the redemption was made at arm’s length. In addition, the company paid the charity fair market value for the shares as determined by a qualified appraisal. It is important to note that a private letter ruling applies only to the taxpayer requesting it. If you are considering a bargain sale of closely-held stock, we urge you to seek the advice of your professional advisors.
Q: Can I make a bargain sale of my personal residence and have the gain quality for the $250,000 ($500,000 for a married couple) capital gains exclusion for personal residences?
The IRS approved this type of transaction via a private letter ruling prior to 1997 when the current capital gain exclusion rules came into being. However, the application of the current rules to a bargain sale would seem to be comparable. Please note that a private letter ruling applies only to the taxpayer requesting it. If you are considering a bargain sale of a personal residence, we urge you to seek the advice of your professional advisors.
Q: What if the property is subject to debt? Can I still make a bargain sale?
The answer is maybe. If the debt exceeds the value of the property, you cannot make a bargain sale because there is no net value to give. However, if you have equity, a bargain sale might still be a viable option. Be aware that debt will reduce the value of your charitable deduction and the amount of your sales proceeds. Furthermore, even though our organization is tax-exempt, the presence of debt might even result in our having to pay unrelated business income tax if we subsequently sell the property. With careful planning, however, a bargain sale might still make sense for everyone.
Q: Can I sell you a portion of my personal residence or farm and continue to live there and/or enjoy its use for the rest of my life?
Yes. This is called a Life Estate/Bargain Sale. Here’s how it works. You deed your personal residence or farm to us while retaining a life estate in the property and sell a portion of the remainder interest to us in exchange for fixed lifetime annuity payments or installment payments. You retain the right to occupy and enjoy the beneficial use of the property (including rental income if you move) for life or lives, receive income payments, a portion of which are taxed at favorable capital gains rates or tax-free, and receive an immediate charitable income tax deduction for the gift portion of the transaction.
Q: What will you do with the property?
We have several options that depend on the property itself: Depending on the type of asset, we can resell the property and put the net proceeds to immediate work for our charitable purposes. We can rent property out and receive income. Or, we can put it to use for our charitable purposes and programs.
Q: Will I need to obtain an appraisal?
If the property is other than publicly-traded securities and your claimed deduction exceeds $5,000 ($10,000 for closely-held stock), you will need to obtain an qualified appraisal in order to claim your income tax charitable deduction.
Q: Should I review a proposed bargain sale with my professional advisors?
Absolutely. Because a bargain sale involves a sale and a gift, it can affect many parts of your personal income tax, financial and estate planning. We recommend that you review any proposed transaction with your advisors so they can help you coordinate it with the other elements of your planning to optimize your benefits. Careful planning might even enable you to give more at reduced cost!