Case #1 · Bill and Sue D.
Bargain Sale of a Home
Selling a $1.5 million home to a favorite charity for $1 million.
The situation
Bill and Sue bought their home in a desirable neighborhood 20 years ago for $300,000. It is now worth $1.5 million.
They are retiring and moving to a retirement community, and have not used their $500,000 primary-residence exclusion.
The goals
- Sell the home and buy a new property
- Receive $800,000 or more in cash for retirement security and liquidity
- Control the timing of the sale
The strategy: A bargain sale to a charity
- The trust planner recommends negotiating with the couple's favorite charity to buy the home.
- The charity agrees to pay $1 million, $500,000 below the $1.5 million market value.
- The $500,000 difference is a charitable gift and creates a deduction, usable this year with a carryforward of up to five more years.
- Two-thirds of the $300,000 basis ($200,000) is allocated to the sale; with the $500,000 exclusion, the adjusted basis is $700,000.
- The taxable long-term gain is $300,000, and tax at 15% is $45,000.
The results
| Cash received | $1,000,000 (above the $800,000 goal) |
|---|---|
| Tax on the sale | $45,000 |
| Potential tax savings on the $500K gift | $150,000 |
| Potential net tax savings | $105,000 |
| Benefit to charity | $500,000 ($400,000 after selling expenses) |
Figures are illustrative and based on the tax rules in effect when the case was prepared. Results vary.
Could a strategy like this work for you?
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