This approach not only benefits the charitable cause but can also provide significant advantages for the property owner, including liquidity, tax savings, and reduction of holding costs.
A bargain sale involves selling a property to a tax-exempt charity at a price below its fair market value. If the sale is to the right type of tax-exempt organization (known as a public charity), the seller is entitled to a tax deduction for the full fair market value of the property in excess of the amount of the purchase price received for it. For this purpose, fair market value is the value at its highest and best use, regardless of how the seller was using the property or how the charity expects to use it.
A bargain sale can result in savings of capital gain tax in addition to a charitable deduction. For example, assume a building purchased for $300,000 that has appreciated to $1 million. A contribution would entitle the owner to a deduction of $1 mil, and there would be no tax on the $700,000 of capital gain. In a bargain sale for $600,000, the basis must be allocated proportionately between the sale and the contribution (in this case, 60/40). Accordingly, the seller would have a $400,000 charitable contribution deduction and a $600,000 sale on which it would have $420,000 of taxable capital gain. (A seller’s deduction is reduced by any depreciation recapture or short-term capital gain that would be taxed as ordinary income on a sale.)
These tax benefits may allow a seller to exit a difficult-to-sell property at a lower price, expedite the sales process and eliminate ongoing carrying expenses. It may allow the charity to acquire a facility for its use well below market value or to make a profit on resale.
In order to take the charitable contribution deduction, the seller must satisfy IRS appraisal requirements. An appraisal of the property must be i) conducted by a qualified appraiser; ii) documented in a written appraisal report; iii) completed no earlier than 60 days before the date of the donation and no later than the due date of the donor’s tax return, including extensions; and attached to the tax return when claiming the charitable deduction. Seller must also obtain a signed acknowledgment from the charity that it received the property.
Bottom Line: A bargain sale to a public charity can offer a win-win solution for property owners struggling to sell challenging real estate assets. FYI, there are brokers that specialize in these transactions.
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