What is a Bargain Sale to Charity and How is it Used in Planned Giving?
September 21st, 2012
A bargain sale to charity is a way to make charitable contributions of property to charity while getting some of the property value back. The donor sells the property to the charity for a price below fair market value. The charity gets the benefit of the property and the donor gets both cash and income tax deductions.
In Ohio, the planned giving attorneys at Gudorf Law Group find that this way of giving makes sense for donors who want to donate their property but can’t afford to donate its full value, need some income through their retirement years, or need to resolve debt on the property before donating it. It can also make sense if the charity can’t afford the full purchase price of property it needs.
Basics of Bargain Sales to Charity
A bargain sale agreement begins with the donor declaring his or her intent to sell the property to the charity at a price below fair market value and then negotiating the final price with the charity. Most often charitable contributions of this sort involve real estate, but it could also involve tangible or liquid assets, such as securities.
The final sale price usually represents the amount that the donor needs back from the property. It could be the amount needed for down payment on the donor’s next home, the entrance fee for a nursing facility, or the amount needed to pay off debt on the property, or the estimated amount the donor needs to live on for the remainder of his or her life. A bargain sale to charity could also be a way for the donor to recoup his or her initial investment in the property so that only the appreciated value is donated. The donor could also agree to donate just enough to maximize income tax deductions for the next one to five years.
Things you need to know about bargain sales to charity:
- Income tax deductions are capped at 30% of the donor’s adjusted gross income (AGI)
- Excess deductions can be carried forward up to 5 years
- Capital gains tax is avoided on the appreciated portion of donated value
- If the property is debt encumbered, the sale could result in tax liability
- Purchase price can be paid in a lump sum or in installments over a period of time to create a stream of revenue for the donor
- Sale could consist of an exchange of one property for another property of less value with the difference in value as the charitable contribution
- Gift can be done outright or as a gift in trust
- Donor/seller must establish his/her intent of making a charitable contribution via the bargain sale to a charity prior to the transaction; attempting to claim a gift to charity after sale negotiations result in below-market-value sale price is usually not allowed
- Installment sales have special rules that must be followed; in Ohio the planned giving attorneys at Gudorf Law Group can advise you appropriately
- Income tax deductions are equivalent to the appreciated value of the property if the donor held it more than 12 months before the sale and profit on the sale would otherwise be calculated as long-term gain
- Income tax deductions are equal to the cost basis if the donor held the property less than 12 months before the sale and sale profit would otherwise be calculated as ordinary income
- If donating a personal residence or farm, the bargain sale may be combined with a gift of remainder interest or life estate agreement so that immediate income tax deductions are realized but donor can continue using property until his/her death or for a specified term of years
- A bargain sale to a charity can be combined with a Charitable Remainder Trust so that the donor or donor’s heirs can make use of the property for a specified period of time before the charity takes ownership
Will a bargain sale to charity achieve your goals for charitable contributions?
There are many things to consider before deciding to donate property through a bargain sale. In Ohio, planned giving attorneys at Gudorf Law Group, LLC, can help you determine whether a bargain sale to charity or other charitable giving vehicle will achieve your goals in the best way possible. Arrange a free consultation with our Ohio planned giving attorneys by calling 1-877-483-6730.
Tags: Charitable Giving