Real Estate Gifting Realized: Bargain Sales
This third article in a series on real estate
gifting issues covers bargain sales.
real estate professionals and their clients should consider all options when
discussing the charitable donation of real property. Real
Estate Gifting Realized, a new
program launched by the CCIM Foundation, facilitates the donation of real
estate to charitable organizations. A donation may be made directly to the CCIM
Foundation or the Foundation can assist with the donation to a chosen charity.
bargain sale takes place when a donor sells a property to a charitable
organization and receives less than the fair market value in return. For a
transaction to qualify for bargain sale treatment, the donor/seller must
establish the intent to make a charitable gift prior to the transaction and the
transaction must produce a charitable contribution income tax deduction under
the Internal Revenue Code.
amount that is less than fair market value is considered a charitable donation
and the amount received by the donor is the amount used for taxable gain
purposes. The donor benefits from the bypass of taxable gain on the gift
portion and receives a charitable deduction on the gift portion. The donor,
however, must recognize taxable gain on the value received. The adjusted basis in
the property must be allocated between the part sold and the part contributed
based on the fair market value of each. Internal Revenue Service Publication 526 provides information on calculating
sales usually involve appreciated property. The charitable deduction may be
reduced if the asset consists in part of ordinary income, such as real property
subject to ordinary income recapture. Gifts of ordinary income property require
that the gift portion claimed as a deduction be reduced to cost basis. Real
property with accelerated depreciation will include an element of ordinary
income for the excess of the accelerated over straight-line depreciation. This
excess will lead to a reduction of the charitable deduction under ordinary
many bargain sales involve mortgaged property, it’s important to understand the
implications. A donation or sale of mortgaged property may be taxable. When debt-encumbered
property is transferred to a charity by outright gift, the entire amount of the
indebtedness is considered realized by the donor for purposes of the bargain
sale rules. The amount of realized gain is calculated as if the donor received
cash in the amount of the indebtedness. This is true for both recourse and
nonrecourse debt. The deduction is the excess of fair market value over the amount
of the outstanding mortgage.
there may be a taxable gain. The IRS and the U.S. Tax Court treat the
transferred mortgage debt as cash received in a part-gift, part-sale
transaction and subject to the rules for bargain sales of appreciated property.
Therefore, there may be a taxable gain if the transferred mortgage exceeds the
portion of basis allocated to the sale part of the transaction. This is true
even if the charity does not assume the mortgage.
sales can be very complicated and bring many variables into play. It is
imperative that the donor’s advisers review the implications for the
donor/seller to make certain that the donor/seller achieves both goals of
providing a charitable donation and obtaining tax savings.
rules on charitable deductions to qualified charities are very detailed and
require review at the time a charitable donation is contemplated as the rules may
change or be impacted by current tax court decisions and case law.
Stark Hood, JD, CFP, is president of the Hood Group, which provides consulting
services to business organizations and foundations. She currently serves as a
consultant to the CCIM Foundation’s Real Estate Gifting Realized Program.
Contact her at email@example.com. Learn more about the Foundation’s gifting
program at www.realestategifting.org.