By Fabiola Santana, CPA, Tax Manager
Charitable Giving and Tax Planning Insights
Many nonprofit organizations have a need to acquire real estate for use in its mission but may not have the funds to pay full fair market value (FMV) for the property. At the same time, a philanthropic individual may be interested in selling a valuable piece of real estate but want to avoid a significant tax obligation as a result of the sale. In certain scenarios, a bargain sale can be a win/win opportunity for both the charitable organization and the individual. Following is an overview of the features and benefits of a bargain sale.
How can a bargain sale help donors reach philanthropic goals?
If structured properly, a bargain sale can satisfy an individual’s desire to dispose of the property for cash proceeds as well as meeting their philanthropic objectives, all while minimizing the tax impact of such a transaction.
A bargain sale occurs when a taxpayer sells property to a charitable organization for less than its FMV. The difference between the FMV and the amount realized, the “bargain element,” is intended to be a charitable contribution. If the donor has both a charitable intent and a desire or need to raise cash at the same time, a bargain sale allows them to capture the full amount of the property’s FMV at the time of sale while limiting the amount of taxable gain the donor will recognize. If the sale to the charitable organization is for the property’s FMV, no charitable contribution element will be associated with the transaction. The transaction will be treated the same as a normal property sale, with the gain or loss determined in reference to the selling donor’s basis. Assuming the transaction does have a charitable element, the contribution will first offset the donor’s ordinary income.
The donor can sell the property to a qualifying charitable organization and take a note back for all or part of the purchase price. If the donor takes a note back, the donor pays tax on the part of the gain attributable to the note as payments are made by the nonprofit on the note. However, the donor gets to claim the full benefit of the contribution part of the bargain sale in the year of sale
Not all not-for-profit organizations are qualified organizations where an individual can make a donation and receive a charitable deduction. In order to receive a tax deduction, the organization must be qualified under IRC Section 501(c)(3) and have its status as a qualified organization recognized by the IRS. Following is a list of examples of nonprofit organizations that do and do not qualify for charitable deductions.
|Deductible as Charitable Contributions||Not Deductible as Charitable Contributions|
|Money or property you give to:||Money or property you give to:|
Read more on this topic in our article, Tax and Philanthropic Benefits of Donating Valuable Real Estate.
If your nonprofit organization is considered a qualified organization and would like to learn more about this charitable giving and tax planning opportunity for your donors, contact your Not-for-Profit Opportunity Advisor. We are here to provide sound advice.
About the Author
The information contained within this article is provided for informational purposes only and is current as of the date published. Online readers are advised not to act upon this information without seeking the service of a professional accountant, as this article is not a substitute for obtaining accounting, tax, or financial advice from a professional accountant.