Gifts Can Be a Bargain!

What is the best thing people can give to charitable organizations they support?  Taxwise, gifts of securities, real estate or other assets that have gone up in value are the hands-down winners. Why? Because donors receive a double tax benefit:  They can deduct the full fair market value of their appreciated assets – not just what they paid originally – and they save again by avoiding all capital gains taxes on the “paper profit.”

Some of our friends, however, would prefer a gift arrangement that “shares” their investment success with a worthwhile cause, and for them a “bargain sale” may be appealing.  A bargain sale, as the name implies, is an arrangement whereby you sell investment assets to charity at a bargain price – with the difference between the price and the value of the property being a gift.

Typically, you would sell securities or other assets for the amount you paid originally.  The amount by which the stock has appreciated above the purchase price (the amount of your charitable contribution) would be deductible as a gift.  And because your cost basis for the stock would be allocated between the gift and the sale, the resulting capital gains tax would be kept to a minimum. 

Assume that you own securities that cost you $4,000 and that the stock is now worth $10,000.  You decide to sell the securities to a qualified organization for $4,000.  It’s clear that you have made a charitable gift of the $6,000 difference – and that $6,000 will be tax deductible.

There will still be a capital gains tax to pay on the sale.  If you had sold the property for its full value, 60% ($6,000) of the $10,000 sale price would be a long-term capital gain (assuming you owned the stock more than one year).  Under current tax law, the same percentage of the bargain sale price is a capital gain.  Under our assumptions, you would have a $2,400 capital gain (60% of $4,000).  But you still come out ahead, thanks to your charitable deduction and avoidance of tax on $3,600 of capital gain.

If a bargain sale of investment assets sounds appealing to you, please call our office.

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