Are you looking to sell your appreciated real estate and want to maximize your financial and tax benefits? A bargain sale to a public charity could be the perfect solution. This strategy not only provides immediate cash but also offers significant tax advantages, especially when combined with charitable contribution deductions that qualify for higher AGI limits. Let’s explore how you, as a seller, can turn your real estate into tax savings opportunity.
What is a Bargain Sale?
A bargain sale involves selling your property to a charity for less than its fair market value (FMV). The difference between the FMV and the sale price is considered a charitable contribution, which can provide substantial tax deductions.
Immediate Financial Benefits
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Immediate Cash Proceeds:
- You receive cash for the portion of the property sold, which can be used for other investments or expenses.
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Charitable Contribution Deduction:
- The difference between the FMV of the property and the sale price can be claimed as a charitable contribution deduction on your federal income tax return. This deduction can significantly reduce your taxable income.
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Avoidance of Capital Gains Tax on the Donated Portion:
- You avoid paying capital gains tax on the portion of the property that is considered a charitable donation. Capital gains tax is only applied to the amount of the sale proceeds over the original cost basis of the property.
Maximizing Tax Advantages with Higher AGI Limits
To fully leverage the benefits of a bargain sale and qualify for higher AGI limits, consider the following strategies:
1. Elect to Deduct Cost Basis Instead of FMV
If you elect to deduct the cost basis of the real estate (the original purchase price plus any improvements), the contribution can be subject to the 50% AGI limit instead of the 30% limit. This approach reduces the potential deduction amount but increases the percentage of AGI that can be used in the current tax year.
Example:
- Fair Market Value (FMV): $500,000
- Cost Basis: $200,000
- AGI: $100,000
If deducting FMV:
- Deduction limit: $30,000 (30% of AGI)
If deducting Cost Basis:
- Deduction limit: $50,000 (50% of AGI)
2. Combining Different Types of Contributions
By combining cash donations with the real estate donation, you can utilize the higher AGI limit for cash contributions while still taking advantage of the property donation. Cash donations to public charities are deductible up to 60% of AGI.
Example:
- AGI: $100,000
- Real Estate Donation (FMV): $30,000 (30% of AGI limit)
- Cash Donation: Up to an additional $30,000 (30% of AGI for a combined total of 60% with real estate)
3. Selling a Portion and Donating the Rest
Sell a portion of the real estate to the charity and donate the remaining portion. The cash received from the sale portion can be donated back to the charity, potentially qualifying the cash donation for the 60% AGI limit.
Example:
- Real Estate FMV: $500,000
- Sell Portion: $300,000
- Donate Portion: $200,000 (FMV)
- Cash donation back to charity:
- Deductible up to 60% of AGI
4. Qualified Conservation Contributions
If the real estate qualifies as a conservation contribution (such as land preserved for public use, historic buildings, etc.), the donation may qualify for a higher AGI limit of up to 50% and, under certain conditions, up to 100% for farmers and ranchers.
Detailed Example Scenario
Assume you have a property with an FMV of $500,000 and an original cost basis of $200,000. If you agree to a bargain sale to a charity for $300,000, here’s how it works:
- Sale Proceeds: $300,000
- Charitable Contribution: $200,000 (FMV of $500,000 – Sale Price of $300,000)
- Capital Gains Tax Calculation:
- Sale Price: $300,000
- Cost Basis: $200,000
- Taxable Gain: $100,000
By executing a bargain sale, you realize $300,000 in immediate cash, pay capital gains tax on only $100,000 instead of $300,000, and claim a $200,000 charitable contribution deduction, potentially reducing your taxable income significantly.
Steps to Maximize Your Deduction
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Obtain a Qualified Appraisal:
- Ensure you have a qualified appraisal to substantiate the FMV of the property. This is crucial for accurately calculating your charitable deduction.
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Proper Documentation:
- Maintain thorough documentation, including the qualified appraisal, sales contract, and IRS Form 8283 (Noncash Charitable Contributions) for deductions over $5,000.
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Report the Sale and Deduction Properly:
- Report the sale proceeds on Schedule D (Form 1040) and the charitable contribution deduction on Schedule A (Form 1040).
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Utilize the Carryover Provision:
- If the charitable contribution exceeds the AGI limits for the current year, the excess deduction can be carried forward for up to five years, allowing you to maximize your tax benefits over multiple years.
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Consult a Tax Professional:
- Given the complexity of the tax rules surrounding charitable contributions and capital gains, consulting with a CPA or tax advisor can ensure that all potential tax benefits are maximized and compliance with IRS regulations is maintained.
Conclusion
A bargain sale to a public charity is a strategic way to achieve both financial and philanthropic goals. By understanding and leveraging the tax advantages, especially the higher AGI limits, you can significantly benefit from this arrangement.
If you’re considering a bargain sale or need personalized tax planning advice, contact G&S Accountancy. Our experts are here to help you maximize your financial benefits while supporting your charitable goals.
