by Dennis Bidwell
April 2013
In my experience there are many property owners with the motivation and financial capacity to make an outright gift of their real estate. That is why I always urge development officers to begin conversations with a prospective property donor with the possibility of an outright gift. When it becomes clear that the donor isn’t in a position to make an outright gift, but could make a partial gift of some sort, there are many different directions to go in at that point.
One of those directions—and one that is quite underutilized, in my experience—is the bargain sale. Not all donors wanting something back as part of the gift arrangement need to have someone else invest funds on their behalf for purposes of making period cash payments, i.e. charitable remainder trust or charitable gift annuity. Often such a donor would be quite delighted to receive a lump sum cash payment.
Enter the bargain sale. A property owner selling their property to an exempt non-profit organization at a price below the appraised fair market value of the property is entitled to a charitable deduction for the difference between the sales price and the appraised value. The deduction from this gift portion can often be used to offset some or all of the exposure to capital gains tax on the sale portion of the transaction. A charity contemplating such a transaction will need access to working capital to cover its purchase price and holding costs prior to the time it sells the property (unless simultaneous sales are arranged.)
Some non-profits are able to use cash in an endowment fund for such a purpose. And some charities, facing the need to come up with cash for the initial purchase, have had success in going to donors to ask for a short-term loan to cover the purchase cost. It’s a loan that would be returned when the property re-sells. Some friends of the organization are delighted to see their funds leveraged in this way. If a donor is told, for example, that their short-term loan of, say $100,000, will make it possible for a net gift to the organization of $150,000, they might find this very appealing.
Technically, a charitable gift annuity funded with real estate is a form of bargain sale, where the “sales price” for the asset being “sold” is the value of the CGA contract. Similarly, the donation of property subject to mortgage is considered a bargain sale, because the non-profit’s agreement assume responsibility for the debt is the bargain “payment” made by the charity.
These are among the situations where I have seen a bargain sale work well for all involved:
- Some property owners are eager to part with their property but dreading the marketing process. Some such owners are delighted to take considerably less than market value for their property in exchange for having the charity handle the marketing and the satisfaction of knowing they have made a meaningful gift.
- Other property owners need a lump sum of cash (rather than a stream of income) for things like children’s’ weddings, purchasing other real estate, family travel, etc.
- And some property owner would rather go through their existing investment relationships to generate income than have funds invested by a charity on their behalf.
A bargain sale can also be a very useful tool for organizations looking to acquire property for their own use at a discounted price. Land trusts seeking to acquire conservation-worthy property, and housing organizations looking to acquire property for development as affordable housing, have enjoyed success in offering a property owner a combination of discounted sales price and tax deduction as an alternative to negotiating with full appraised price as the starting point.
A very recent U.S. Tax Court decision confirmed that certain elements must be in place for the bargain sale to trigger a charitable deduction: 1) an acknowledgment letter from the charity stating that the charity paid $X for the gift of the property; 2) a qualified appraisal commissioned by the donor/seller; and 3) evidence of donative intent.
See https://www.ustaxcourt.gov/InOpHistoric/Boone3.TCM.WPD.pdf.
My advice to gift officers talking with property owners who have indicated a readiness to part with their real estate: After pursuing the outright gift possibility, keep the bargain sale possibility in mind!