Bargain Sale Strategy
A bargain sale is the technical term used for a gift of a mortgaged property to a non-profit organization. This is considered by the IRS to be a part sale - part gift transaction. The sale part is equal to the outstanding obligations less the prorated remaining basis. The gift portion is equal to the appraised value minus the outstanding obligations.
Under this approach, the owner(s) would get an appraisal of the project and then gift their interests to a qualified non-profit or 501(c) 3. Any remaining tax basis in the property would be prorated between the sale and gift portions.
This strategy is best used on projects with low negative capital accounts and where the mortgage balances are lower than on a standard project. Most of these will have used DIAS accounting, had full rental assistance or project based subsidies, or have a HAP contract along with a RHS subsidized loan. The objective of this strategy is to use the tax deduction from the gift to charity to offset the recapture and capital gains tax in order to create a net deduction.
Housing & Tax Consultants, LLC has an arrangement with a qualified 501(c) 3, DLH Low-Income Housing, Inc. to accept gifts of partnership interests as well as outright gifts of assets. We can project and outline what the net tax savings would be through our Project Analysis Service.