August 2009
Dear Friends of Our Firm,
In this current economy, some car or boat owners may be trying to unload their prized possessions at a reasonable price. But they don’t want to “give it away” either.
Strategy: Arrange a bargain sale to charity. Unlike a regular charitable donation, the seller receives cash back from the charity plus a write-off based on the difference between the bargain sale price and the property’s fair market value.
Will the charity agree to the deal? Many tax-exempt organizations buy vehicles while others specialize in bargain sales of boats (see "Fishing for boat donations?" below).
Background information: When taxpayers sell assets such as cars and boats to charity at bargain prices, they must treat part of the transaction as a sale and the other part as a charitable donation. The part that’s considered a donation is the difference between the asset’s fair market value and the bargain price. The other part may result in a taxable gain if the owner’s basis is low.
To determine the amount of the taxable gain, adjust the basis to take into account both parts of the transaction. The formula for determining adjusted basis for the taxable sale part is:
Adjusted basis of the entire property x sales proceeds
FMV of entire property.
By planning ahead, you can use the tax deduction for the charitable part of the sale to offset any taxable gain on the sale portion with plenty to spare.
Let’s take a look at a couple of examples to illustrate the tax ramifications.
Example 1:
Bargain sale of appreciated property
Ari Miller bought a boat several years ago for $30,000 that’s now worth $40,000. If Ari sells the boat to charity for the original $30,000 cost, his adjusted basis for the taxable portion of the bargain sale is $22,500 (75% × $30,000). Thus, he realizes a taxable gain of $7,500 ($30,000 – $22,500). Because the gain qualifies as long-term capital gain taxed at the maximum 15% federal capital gain tax rate, Ari will owe Uncle Sam $1,125 in tax (15% of $7,500).
However, he is also entitled to a charitable deduction for the extra $10,000 attributable to the value of the boat ($40,000 – $30,000), assuming the charity uses it to further its tax-exempt purpose. If Ari is in the 33% tax bracket, the deduction is worth $3,300 to Ari – almost three times the tax on the gain. Plus, he walks away with $30,000 in cash.
The bargain sale strategy also can work for the property that has declined in value.
Example 2:
Bargain sale of depreciated property
Suppose Eva Santos bought a car for $30,000 that’s now worth $20,000. She agrees to sell the car to charity for $15,000. In this case, she will receive $15,000 in cash from the charity and claim a $5,000 charitable tax deduction on her return ($20,000 – $15,000). Eva pays zero tax on the sale because the car is worth less now than when she bought it.
Since a bargain sale involves a valuation of a boat or car, you must contend with strict substantiation requirements now imposed by the IRS. But there is less at stake here than with a straight donation. Reason: The key to the deal is the bargain price arranged with the charity (i.e., the amount of cash the seller receives in the deal.)
Fishing for boat donations?
Here are a few online sources:
American Institute of Marine Studies: www.aimsamerica.org/default.pk?tsearch=donate+boat
Marine-Network.com: www.projectboatco.com
BoatAngel: www.boatangel.com/donate-boat.htm
IRS Docks Deduction for Direct Donation
A tax roadblock for vehicles donated to charity could also limit straight donations of boats.
Alert: In a new private ruling, the IRS says that the deduction limits for vehicles apply to boats as well. Thus, if the boat’s value exceeds $500 and the charity sells it, the donor can’t claim a deduction exceeding the sales price.
On the other hand, a taxpayer can deduct the full fair market value of a donated boat if the charity uses it to further its tax-exempt function (e.g., delivering food to the poor or needy). But this tax break does not extend to charter boats.
Observe the Tax Rules of the Road
Under the strict substantiation requirements in the tax law, you must obtain a written acknowledgment from the charity for the donation of a “qualified vehicle” (i.e., a car, boat or aircraft) within 30 days of the donation or the sale of the property by the charity. The acknowledgment should include the donor’s name, taxpayer ID and a vehicle identification number.
Additional information is required depending on whether the charity sells the vehicle without any significant intervening use or modification or the charity keeps it.
- If the charity sells the vehicle, it must provide a certification that the property was sold in an arm’s length negotiation to an unrelated party, the gross proceeds of the sale and a statement indicating the deduction does not exceed the gross proceeds of the sale.
- If the charity keeps the vehicle, it must provide a certification stating the intended use of the vehicle (or any intended improvement) and the intended duration of use, and a certification that the vehicle won’t be transferred prior to its intended use.
Advisory: Assemble as much information as possible to substantiate a vehicle’s fair market value. This includes not only stated valuations in used-vehicle pricing guides, but also photos or videos of the property and statements from mechanics.
If you have any questions about ‘Bargain Sales’, please do not hesitate to call us at 262-754-4300 to arrange a personal consultation.
