Case:

Karl Hendricks lived in a beautiful mansion just one mile from a major university. The lovely home had four white pillars and was a classic style. Karl bought the home 20 years ago for $600,000 and it has an estimated value today of $2 million.

Karl has been visiting with a continuing care retirement center (CCRC) about purchasing an independent living residence. He is now age 85 and would enjoy all of the amenities of the CCRC. It is a fairly exclusive CCRC and Karl is considering a unit that has a $1 million price tag.

Fortunately, the university is interested in acquiring Karl's home. It has the size, style and floor plan that make it an ideal residence for the university president. The Vice President of Development visited with Karl to discuss possible options. Karl is a donor to the university but has never made a major gift.

Question:

How can Karl receive the $1M for the CCRC home and still help the university?

Solution:

In a visit with Karl, the university vice president of development explained the benefits of a bargain sale. With a bargain sale, Karl would receive a substantial cash amount, but would also benefit from a large charitable deduction. An excellent benefit of the bargain sale is that Karl would have a convenient transaction with the university and would not have to list the property and negotiate with any buyers.

With a bargain sale, Karl would need to obtain a valuation from a qualified appraiser. Fortunately, appraisers for homes are readily available. After discussions with the university CFO, Karl decided to sell the $2 million home to the university for $1.4 million. The $600,000 balance in value is a charitable deduction.

Karl is able to allocate the prorated basis and his $250,000 principal home sale exclusion to the cash portion. With his gain, he paid tax of $207,060 on the sale portion. However, the charitable deduction in his tax bracket saved $210,000. Because this is an appreciated deduction, Karl plans to spread his 30%-type deduction and tax savings over a period of about four years.

Karl is delighted with this plan. He used $1 million of the $1.4 million in cash to purchase a beautiful independent living home in the CCRC and invested the other $400,000. Over a period of four years, his charitable tax savings will offset the tax payable in the year of the sale. The university received the property and the president and his wife are now entertaining dignitaries and other guests in the lovely home.