Planned Giving for Financial Advisors
Charitable Bargain Sale — Detailed Gift Description
A Charitable Bargain Sale is effective when your client wants to make a gift of property she no longer uses or wants to maintain, but from which she would like to clear some cash — perhaps for a down payment on a retirement home, a child's educational expenses, or just a nest egg. The concept is simple: your client sells the property to Harper College Educational Foundation for less than the appraised value. Most often, bargain sales are used for real estate, but they can also be used in some cases for other types of property.
Before your client decides to contribute real estate, Harper College Educational Foundation must screen the property to be sure we can accept it and that it is marketable. We can accept residential, rental and commercial property, farmland, and vacant lots, but we are not able to accept property that is unmarketable, environmentally damaged, or otherwise inappropriate for us to own. We will ask your client for documentation and information about the property, and we will send someone out to inspect the property.
We encourage you to talk with your client about her reasons for entering into a Charitable Bargain Sale and help her understand the due diligence we must undertake to be sure we can accept the property and convert it easily to proceeds that can be applied to our charitable purposes.
Please note also that Harper College Educational Foundation cannot accept property encumbered by debt, so if your client currently holds a mortgage on the property to be used for the Charitable Bargain Sale, she will need to affirm that she will extinguish the mortgage before or at the time of sale.
If Harper College Educational Foundation is able to accept the property, your client and we will agree on a purchase price that is less than the property's fair market value as determined by an independent appraiser. Your client will need to establish the intent to make a charitable gift prior to the transaction and the transaction must produce a charitable contribution income tax charitable deduction under the Internal Revenue Code (in other words, the sales price must be somewhat less than the appraised fair market value).
Once the sales price has been set, the parties will proceed to closing. Harper College Educational Foundation will pay the purchase amount in a lump sum, or we can issue your client an installment note for a mutually agreed-upon term of years and at an agreed-upon interest rate. Some individuals choose a lump-sum bargain sale payment to help them purchase a new home or to cover the entry fee for a retirement facility. Others prefer to enjoy the income stream from an installment note.
Calculating the income tax charitable deduction and allocable capital gains
To calculate your client's deduction and the tax consequences of a Charitable Bargain Sale, you'll need to know the property's appraised value and its cost basis.
Your client's income tax charitable deduction amount will equal the difference between property's fair market value and its sales price (the charitable gift portion of the transaction). As an added benefit, the donor also avoids the capital gains tax on the portion of the transaction that was a gift to charity.
To calculate the amount of capital gain that must be recognized, you can follow this simple example:
Your client owns real estate that she purchased for $100,000 and that an independent appraiser has valued at $500,000.
She agrees to sell the real estate to Harper College Educational Foundation for $200,000.
Determine the charitable portion of the gift:
Subtract the sales price from the appraised value
$500,000 - $200,000 = $300,000
Your client can claim an income tax charitable deduction of $300,000 for the gift.
Determine the amount of capital gain your client will recognize:
Divide the sales price by the fair market value of the property:
$200,000/$500,000 = 40%
Multiply the percentage above by the property's cost basis:
0.40 x $100,000 = $40,000
This is your client's cost basis allocated to the sale.
Subtract the cost basis allocable to the sale from the sales price
$200,000 (sales price) - $40,000 (cost basis) = $160,000 reportable capital gain
Property other than real estate
It is possible to complete a bargain sale with property other than real estate. In such cases, your client will still need to obtain a qualified appraisal to value the property. If the property is not reasonably anticipated to be used for a purpose related to our charitable mission, the client's income tax charitable deduction will be limited to the lesser of the property's fair market value on the date of contribution or your client's adjusted cost basis.