Tax Director
Charitable giving is an effective way to align philanthropic goals with tax planning, particularly when donating appreciated property. Generally, contributions of long-term capital gain property to qualified charities are deductible at fair market value (FMV), subject to AGI limitations.
When the donated property is encumbered by debt, transferring the liability to the charity can be difficult. In these cases, a bargain sale may be a practical alternative.
A bargain sale occurs when property is transferred to a charity for less than FMV, creating both:
- a sale component, and
- a charitable gift component
Importantly, any debt relief is treated as consideration received, and is included in the sale price.
Calculation Framework
Charitable deduction
FMV – sale price = deductible contribution
Bargain sale ratio
Sale price ÷ FMV = percentage
Taxable gain
Sale price – (adjusted basis × ratio) = recognized gain
Example
| Item | Amount |
| FMV of building | $1,000,000 |
| Mortgage debt | $250,000 |
| Total sale price (including debt relief) | $350,000 |
| Adjusted basis | $400,000 |
Charitable deduction:
$1,000,000 – $350,000 = $650,000
Bargain sale ratio:
$350,000 ÷ $1,000,000 = 35%
Taxable gain:
$350,000 – ($400,000 × 35%) = $210,000
In this structure, the sale proceeds can be used to satisfy the mortgage, cover taxes, and pay transaction costs such as a qualified appraisal. Any unused charitable deduction may be carried forward for up to five years.
Key Considerations
- Ensure compliance with IRS substantiation requirements, including a qualified appraisal
- Evaluate AGI limitations and carryforward rules
- Carefully structure the sale price to balance liquidity needs and tax impact
Contact a WFY advisor here to learn more or call (949) 910-2727.
Wright Ford Young & Co. is headquartered in Irvine, CA and is one of the largest local CPA firms in Orange County. WFY is a full service corporate accounting firm offering audit, tax, estate and trust, and business consulting services to closely held company and family business owners. More information about our Firm can be found at www.cpa-wfy.com.