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You would consider entering
into a partnership with your favorite charity
in order to make a significant gift >
You hold marketable real estate > You
want to secure some cash from the property
on a transfer > You want to reduce capital
gains tax and also secure an income tax
deduction
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You can sell your residence or other property to your favorite charity at less than its fair market value. The charitable bargain sale gives you cash that you can use to purchase your next home or as the entry fee for a retirement community, and it gives you a charitable income tax deduction for the discount you took from the market value.
The charitable bargain sale works
like this: you and the charity agree on a purchase
price that is less than the property’s fair
market value, as determined by an independent
appraisal. The charity may pay the purchase amount
upfront, or pay installments as you agree. The
charity will then use the property for its institutional
purposes or sell it.
The bargain sale is the only gift plan that can give you both a lump sum of cash and a charitable deduction. In addition, if capital gains are a concern, you avoid that tax on the gift portion of the transaction.
Here are some considerations if you are contemplating a bargain sale:
- With
all gifts of real estate, the financial officers
of the charity must review and approve the transfer.
- You will
need to secure an independent appraisal of the
property to establish its value for the deduction.
The charity can advise you on these matters.
Note that if you give property carrying debt – like a mortgage or a lien – and the charity assumes and satisfies the debt, the IRS considers your donation to have been a bargain sale, even if the charity didn't pay you any cash. The amount of debt it assumes will be considered taxable income to you.
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Example
You're ready to move to a retirement community across town. You know that you will need some of the equity in your current home for the entry fees there. However, your home has appreciated significantly over the years, and you would like to use some of the excess value to fund a gift to your favorite charity.
You decide to transfer your home to the the charity through a charitable bargain sale. You secure an independent appraisal valuing the house at $500,000, and the charity agrees to pay you $300,000.
What are your benefits?
Asset contributed: Residence
Fair market value: $500,000
Cost basis: $100,000
Capital gain: $400,000
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Purchase portion
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$300,000
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Donation portion
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$200,000
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Charitable deduction
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$200,000
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Purchase portion of transaction
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60%
($300,000 / $500,000)
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Donation portion of transaction
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40%
($200,000 / $500,000)
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Purchase portion capital
gain
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$240,000*
(60% of total)
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* The first $500,000
of capital gain on a primary residence is
excluded from capital gains tax, so no tax
applies in this example.
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