Question: I intend to sell to a charity a vacant lot that I have owned and held as an investment for many years for less than the current value. Can I take a charitable contribution deduction for the difference?
Answer: The transaction you describe, a bargain sale to charity, will, generally speaking, entitle you to a charitable contribution deduction. The amount you may deduct is the difference between the current market value of the property and the sale proceeds of the property. You will be subject to income tax on the gain from the portion of the vacant lot that you sell. This requires you to allocate your tax basis between the portion of the property you sell and the portion of the property you contribute.
Suppose you purchased the vacant land for $50,000 which is now worth $400,000 and you sell the same to a charitable organization for $100,000. You would be entitled to a charitable contribution deduction, subject to various deduction limits, for the difference between the property’s market value of $400,000 and the $100,000 you receive from the charity or $300,000. But your tax basis in the property, the $50,000 you paid to acquire the vacant land, must be allocated proportionately to the portion of the property you sold and the portion of the property you gifted. Since the portion of the property you are transferring by gift is $300,000 and the portion of the property you are selling is $100,000, 75% of your basis ($300,000/$400,000) is allocated to the gift portion and 25% of your basis is allocated to the sale portion. You must then report as a gain the difference between the sale proceeds of $100,000 and the $12,500 of your tax basis allocated to the sale portion (tax basis of $50,000 x 25%) resulting in a $87,500 gain from the sale.
The calculation in this case is relatively straightforward but could become more complicated. If the land you held is not a capital asset meaning that it was used in a trade or business of yours involving real estate, the charitable contribution would be limited to the amount of ordinary income you would report on the sale. If, for example, you were a dealer in real estate, the tract of land may not be a capital asset and your charitable contribution could be reduced. Also, if you did not hold the land for a period of more than one year, then the gain from the sale would be a short-term capital gain rather than a long-term capital gain and there would be a reduction in your charitable contribution deduction.
As with any charitable contribution, you must consider various limitations that come into play in determining the amount of your tax deduction. You need to be eligible to itemize your deductions, meaning your personal deductions consisting of charitable contributions, mortgage interest, allowable State and local taxes and other itemized deductions would need to exceed the itemized deduction threshold; otherwise, the charitable contribution may not be deductible. Also, there are various limitations on the amounts that can be contributed to charities which depend upon your adjusted gross income and whether the charitable organization is a public charity, a private foundation or some other type of organization. While the portion of your charitable contribution which exceeds the deductible limit may be carried forward to the future and deducted in future years, the tax on the gain from the portion of your property you sell must be reported in the year the transaction closes.
Complicating factors could arise in other circumstances as well. If the property you contribute is subject to a mortgage loan, additional gain may have to be reported from the bargain sale transaction. Moreover, if the property in question is tangible property for which depreciation deductions are allowable, then the amount you have claimed as depreciation in past years will reduce your original tax basis in the property and could increase the amount and character of the gain that must be reported.
There are various intricacies that arise in connection with a contribution of property to a charity where consideration is received in return. All of these factors must be carefully analyzed to ensure you are structuring the transaction in an optimal tax manner.
The Tax Corner addresses various tax, estate, asset protection, and other business matters. Should you have any questions regarding the subject matter or if you have questions, you want answered, you may contact Bruce at (312) 648-2300 or send an e-mail to bruce.bell@sfbbg.com.
