charitable donation
My three partners and I are looking into divesting of a student housing complex that we developed in 2006.
We each have invested just over $400,000 to acquire, develop, and maintain the complex. We each have over $500,000 in passive carry forward losses. 80% of the $5million construction cost has been amortized.
The property was appraised at $6.4 million when we last refinanced in 2021. Replacement costs would currently be in excess of $10 million. However, buyers have offered less than $3 million for the property. We currently have a mortgage of just under $3 million. Therefore we are considering making a charitable donation of the property to a not-for-profit entity.
Can anyone provide an analysis of the tax consequences of such an undertaking versus a sale?
Best Answers
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Hello Dcaru,
There are a few things to consider when making a charitable contribution:
- Timing of the donation
- Deductible amounts
- Limitations of the donations
- Carry over rules
Also, you need to have a bonified appraisal of the non-cash donation.
Timing
When it comes to "timing" make sure the donation is complete before the end of the year in which you want to apply it. With a donation like this, you would want to get started early in the year to make sure you have plenty of time to complete all the necessary paperwork to transfer ownership, etc.
Deductibility
To be deductible, it must be made to a qualified organization. The deductible amounts are generally limited to the Fair Market Value of the property including capital gain and passive loss adjustments. This is where an appraisal will be needed.
Limitations
The limitations of the donation are generally limited to 50% of your adjusted gross income (30% for private foundations). Also, you cannot use your passive active loss carryforwards on your return. Those losses are added to the Adjusted Basis of the property to the donee. See USC 496(j)(6) for information on special rules for gifts where a passive activity loss is involved.
" 6) Special rule for gifts In the case of a disposition of any interest in a passive activity by gift—(A)the basis of such interest immediately before the transfer shall be increased by the amount of any passive activity losses allocable to such interest with respect to which a deduction has not been allowed by reason of subsection (a), and (B) such losses shall not be allowable as a deduction for any taxable year."
The IRS says the following about "Gift to charitable organization.
If you give property to a charitable organization, you figure your deduction for your charitable contribution by reducing the fair market value of the property by the ordinary income and short-term capital gain that would have resulted had you sold the property at its fair market value at the time of the contribution. Thus, your deduction for depreciable real or personal property given to a charitable organization does not include the potential ordinary gain from depreciation.
You may also have to reduce the fair market value of the contributed property by the long-term capital gain (including any section 1231 gain) that would have resulted had the property been sold. For more information, see Giving Property That Has Increased in Value in Pub. 526."
Carry Overs
If your donation exceeds the limits, there may be limits to what can carry over to following year. Generally, you may use any carry over amounts for the next 5 years.
In conclusion, you would be wise to consult with an expert tax preparer to see if this all makes sense for you and your partners. Hope this helps….
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Thank you for your expedient and comprehensive response.
There is a lot to digest to discern any tax advantage to the donation?
Answers
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I have read over your response several times and I have reviewed the IRS publications you reference. I am now more confused than when I began!!?? Please comment on the following hypotheticals to help me understand which is a more favorable pursuit. I will not construe your response as "tax advise" and will consult with accountants with expertise in charitable contributions if it proves to be the better option.
Sale Donation
2.8 mil.=best offer just pays off mortgage 6.4 mil=appraised value
2.6 mil=accumulated depreciation/recapture 2.8 mil=remaining mortgage assumed
1.2 mil=combined investment 3.6 mil=unadjusted donation(1)
1.4 mil=taxable gain
2.2 mil=carry forward passive loss/how would
this be handled??
(1) How would the proceeds from a sale at fair market value ( 6.4 mil? ) and 2.2 mil. carry forward passive loss impact the 3.6 mil. unadjusted donation?
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Reply did not post as written?? Expand above for clarity?
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Sale// Donation
2.8 mil.=best offer just pays off mortgage //6.4 mil=appraised value
2.6 mil=accumulated depreciation/recapture //2.8 mil=remaining mortgage assumed
1.2 mil=combined investment //3.6 mil=unadjusted donation(1)
1.4 mil=taxable gain
2.2 mil=carry forward passive loss/how would
this be handled??
(1) How would the proceeds from a sale at fair market value ( 6.4 mil? ) and 2.2 mil. carry forward passive loss impact the 3.6 mil. unadjusted donation?
Added// to try and clarify??!!
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Hi dcaru,
Thank you for sharing your details about the Sale vs. Donation. Just so you know, an analysis like this could take hours and really is out of our scope as a FreeTaxUSA moderator or tax expert. We can answer general tax question, but cannot do any tax planning, even if it is a "what if?". I would encourage you to engage a professional tax advisor for assistance on what direction to go.
Keep in mind that there may be benefits for both. For example the donation option may give you several years of Itemized Deduction carry overs of the charitable donations. That alone could be very beneficial tax wise. I just cannot get into the analysis.
If there are any community members who want to weigh in, they are welcome too.