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Does purchaser receive a contribution deduction?

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Does purchaser receive a contribution deduction?

One of the board members of our 501(c)(3) nonprofit organization wants to sell a parcel of land he owns and donate the funds to our organization. He does not need a tax write off himself. He has offered to sell the property to a third party at a reduced price ($1), in exchange for the third party making a donation to our organization for the balance of the price. Most of our advisors do not see a problem with this transaction, but one person has suggested that it would not be deductible to the third party since the third party is receiving a benefit. The rest of us believe it is deductible since the third party receives no benefit from our organization, similar to corporations offering matching gifts, or charitable donations tied to purchases etc. What is your opinion?

I agree with your skeptic.  I don’t think the third party will be able to claim a charitable contribution deduction because it is a “quid pro quo” for the lower purchase price and not voluntarily given without the expectation of personal benefit.  But it is worse for your board member.  He will be deemed to have sold the property for the dollar plus the “contribution.”  If that totals more than his tax basis in the property, he will have a gain subject to income tax, without the cash from the transaction to pay it.  It will have to come out of his pocket.  It is not entirely clear that your director will be able to take a deduction for the amount transferred by the third party to your organization.

The most tax-efficient way to do this deal, assuming the board member has a built-in long-term capital gain, is to have him give you the property, take the full value deduction and let you sell it to get the cash.  If you don’t want to be in the chain of title, which may be a good idea if there is any possibility of environmental or other liability, let him sell it, retain the amount necessary to pay the taxes, and give you the balance.  You can do the deal he proposes, but neither the buyer nor the seller is likely to receive the tax treatment they expect.

Tuesday, November 13, 2012

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Comments

The charity and its board member might want to consider two other options. To keep the charity out of the chain of title, it could set up a single-member LLC to receive the gift.  Also, depending on the donor's other income and deductions and the amount of appreciation, he might consider selling the property, realizing the capital gain but then being able to claim his deduction subject to the 50% limit for cash gifts rather than only the 30% limit for property gifts. --B.G. via email

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