Charitable Bargain Sale

A charitable bargain sale is a sale of your residence to Kanuga at less than its fair market value.

You receive cash from the transaction that you can use to purchase your next residence or to make a down payment on a retirement facility, plus a charitable deduction for the discount you took from the market value. (The concept also applies to an outright donation of a residence where Kanuga assumes the mortgage.)

How It Works

You and Kanuga agree to a purchase price that is less than the property’s fair market value as determined by independent appraisal. Kanuga may pay the purchase amount upfront or issue you an installment note for a mutually agreed upon term of years and interest rate. Kanuga then liquidates the property.

The result is that you qualify for a charitable income tax deduction and avoid capital gains tax on the gift portion of the transaction. You can receive upfront cash for the move to your next home or receive income for a term of years and you make a significant gift to Kanuga.

Advantages

A bargain sale has several advantages for older friends of Kanuga who own their own homes. The agreement is usually only a couple of pages, and there are no significant legal expenses in setting it up.

The terms of the agreement — interest rate, down payment, term, frequency of payments, gift portion and tax deduction — are all negotiable and can be adjusted to fit a donor’s goals and objectives. Finally, a bargain sale often produces better tax results than a traditional life-income gift.

Example of a Charitable Bargain Sale
(based on 7.2 percent IRS discount rate)

You and your spouse donate a personal residence having an appraised value of $500,000, a cost basis of $100,000 and a mortgage balance of $75,000. The purchase price Kanuga pays is $125,000. That is, Kanuga pays you $75,000 cash up front and pays you the balance of $50,000 over five years at 6 percent interest. Below are the calculations.

CHARITABLE BARGAIN SALE
Total Sale Portion Gift Portion
Fair Market Value $500,000 $125,000 $375,000
Basis $100,000 $25,000 $75,000
Gain $400,000 $100,000 $300,000
SALE PORTION
Down Payment Note for Balance Interest Rate 6 percent
Number of Years 5
Fair Market Value $75,000 $50,000 Payment Start Year 1
Basis $15,000 $10,000 Number of Payments 20
Gain $60,000 $40,000 Date 12/25/2007
NOTE PAYMENT
Annual Total Monthly
Allocation $11,600 $57,998 $967
Interest $1,925 $9,623 $160
Capital Gain -0- -0- -0-
Tax-Free $9,675 $48,375 $807
SUMMARY OF BENEFITS
Charitable Income Tax Deduction $375,000
Capital Gains Avoidance on Residence* $400,000
Remainder Capital Gains Spread Over Note -0-
Cash Up Front $75,000
Income Over Term of Note $57,998
Charitable Gift to Kanuga $375,000
* Because there is a capital gains tax exclusion of $500,000 per couple on the sale of a personal residence, all capital gains tax is avoided in this example.


For information and assistance with any form of giving to Kanuga, please contact Randy Boone, Kanuga’s director of development, at 828-692-0077, ext. 240, or . Persons considering a sizeable donation to Kanuga or interested in providing for Kanuga in their estate plan should seek the advice of a financial advisor and/or attorney.