Donating a Car or Boat? How to Use the Bargain Sale Rules to Get Deduction and …

Do you own a boat or a car you might donate to charity? Before you pull the trigger, consider another option.

Strategy: When possible, arrange a “bargain sale” to a qualified charitable organization. By combining a sale and donation, you get cash back from the charity, plus a write-off based on the property’s fair market value.

Many charities buy and sell vehicles, while others specialize in bargain sales and donations of boats (see below).

Here’s the whole story: For tax purposes, when you engage in a bargain sale, you treat part of the transaction as a sale and the other part as a charitable donation. The donation part is the difference between the asset’s fair market value and the bargain price. The sale part can result in a taxable gain if your basis is low.

To determine the amount of the taxable gain, adjust your basis to take into account both parts of the transaction. The formula for determining adjusted basis for the taxable sale is (1) the adjusted basis of the entire property multiplied by (2) the amount realized divided by the fair market value of the entire property.

With advance planning, you can use the tax deduction for the charitable part of the sale to offset the taxable gain on the sale portion–with room to spare. Let’s look at examples when property has increased and decreased in value.

Example 1: Suppose you bought a boat several years ago for $30,000 that’s now worth $40,000. If you sell the boat to charity for the original $30,000 cost, your adjusted basis for the taxable portion of the bargain sale is $22,500 (75% x $30,000). So you realize a taxable gain of $7,500 ($30,000 sales proceeds minus $22,500 basis). Because the gain qualifies as long-term capital gain taxed at a 15% rate for most taxpayers (20% for those in the top ordinary income tax bracket of 39.6%), you’ll probably owe $1,125 of federal capital gains tax (15% of $7,500).

But you’re also entitled to a charitable deduction for the extra $10,000 attributable to the excess value of the boat, assuming the charity uses it to further its tax-exempt purpose. In the 33% tax bracket, the deduction is worth $3,300 to you–almost three times the tax on the gain. And you walk away with $30,000 in cash, too.

The bargain sale strategy can also work for property that has declined in value.

Example 2: Now say that you bought a car for $30,000 that’s now worth $20,000. You agree to sell the car to a charity for $15,000. In this case, you’ll receive $15,000 in cash from the charity and claim a $5,000 charitable tax deduction on your return. You pay zero tax on the sale because the car is worth less now than when you bought it.

Since a bargain sale involves a valuation of a boat or a car, you must observe the strict substantiation requirements imposed by the IRS. Reason: The key to the deal is the bargain price arranged with the charity (i.e., the amount of cash you’re receiving in the deal).

Tip: If you sell a car or a boat to charity, obtain a written acknowledgment from the charity within 30 days of the sale.

——

Fishing for charities online

Many charitable organizations are involved in donations for vehicles. One of the most popular is Kars 4 Kids at www.kars4kids.org. But it’s harder to find charities that will arrange a bargain sale for a boat. Here are several online sources.

* BoatAngel: www.boatangel.com/donate-boat.htm

* BoatU.S. Foundation: www.boatus.org/donate/boat-donation.asp

* National Marine Institute: www.marineinstitute.org/boat_donation.htm

Tip: Research charitable organizations through www.charitynavigator.org

—————

This article was originally written by Small Business Tax Strategies for Small Business Tax [http://www.businessmanagementdaily.com/category/small-business-tax?affilateid=Tribune]

Copyright 2015 – Business Management Daily


Similar news:
You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.
Leave a Reply

XHTML: You can use these tags: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>