Dear Fragrantgas-ga,
In order for you to make this work, to get the full benefit of
the donation, you must hold the property long-term.
That means one year and a day.
That will make it Capital Gains property, allowing a full,
fair-market-value donation.
Otherwise, it's ordinary gain property, and you may only
take a deduction for your purchase price and costs.
Beware of receiving the easement. If they give you an easement,
you've now received something of value. Be sure to get a written
appraisal that spells out the value of the easement.
Naturally, the property is worth little or nothing to you without it.
I am not certain how you would treat the easement they give you.
Best advice is pay the university for the easement. You could give
them a note for it due about 13 months after you buy the easement.
That would assure the university that you would still intend to
honor the donation.
Note: you will have to pay interest on that loan.
Arrange to buy the easement at the outset. Otherwise, you won't have
a long-term capital gain. So, don't donate the property until you've
owned it and the easement fora year and a day.
That said, let's suppose the easement costs you $100,000.
Your new basis in the property will be $350,000 (250+100), plus
all your escrow and legal costs.
Now you wait out the year and make the donation.
A year goes by and you make the donation.
Your donation will be for $750,000.
Your annual charitable contribution deduction is limited
to 30% of your adjusted gross income or AGI(the last line
on page 1 of your Form 1040).
So if your annual income results in an AGI of $160,000 every year,
your donation is limited to $48,000 per year.
You don't say how old you are, or if you have other deductions,
like medical or mortgage. So I don't know what your exemptions
or standard deductions will be.
You don't tell me what the other income is from, so I don't know
if you have any alternative minimum tax issues that would rear
their ugly heads.
Assuming that you have no other itemized deductions, except for
a property tax on your home of about $3,000. And that you are married,
with no dependents. Assuming there is no alternative minimumt tax.
For IRS
AGI 160,000
Itemized deductions
prop tax 3000
charity 48000 (51,000)
2 exemptions ( 6,200)
Taxable income 102,800
Tax (married, joint) (rounded) $19,200
Note - the deduction dropped your tax bracket from 28% to 25%
so, it's worth 25% of $48,000 each year - or up to $12,000 per year.
FOR CALIFORNIA
AGI 160,000
Itemized deductions
prop tax 3000
charity 48000 (51,000)
no exemptions
Taxable income 109,000
Tax (married, joint) (rounded) $6,200)
For California, you're in the top tax bracket of 9.3%.
The donation does not bring you into a lower tax bracket.
So, it's worth 9.3% of $48,000 each year - or up to $4,500 per year. (rounded)
Overall, you'll save about $16,500 per year in taxes.
To recoup the outlay of $250,000 would take you perhaps
15 years, without taking into account the opportunity
costs of the earnings you might have had, if you had
invested that $250,000.
It sounds good until you're faced with the deductions limitations.
Sorry, I'd recommend against this if the purpose is tax planning.
Best wishes
Your TaxMama-ga |
Clarification of Answer by
taxmama-ga
on
17 Jun 2005 09:25 PDT
Hi Fragrantgas-ga,
You asked:
Are you saying that if I purchase and donate the property within a
year and a day that I can only deduct my purchase price and costs,
even though the donation value is $750,000, backed by a certified
appraisal?
Yes. If you hold it short-term, your deduction is limited to your costs.
To get the privilege of deducting the full fair market value,
you have to hold the asset for over one year.
Your next question:
Also, do the numbers look better if I can purchase for $425,000, and
donate for $3MM? I'm thinking of assigning my contract to someone who
has a lot of Google capital gains and wondering what the $ value of
the contract would be. I'm assumning it's higher than $425,000.
Remember, raising the value of the donation still won't raise
the amount you can deduct each year.
Your deduction is still limited to 30% of your AGI.
The rest of the donation will get carried forward to future years.
But I wouldn't recommend spending $250,000 and to get
$16,500 per year for your trouble. Heck, if you just put
the money into a fixed investment, you can probably get
5% ($12,500) today - and you'd still own the $250,000 you
started with. But you don't shelter any taxes.
Incidentally, if your donation is the fair market value,
and the tax rates are 25% and 9.3% = 34.3%, after all your
trouble, you'll only ever recover $257,250 (34.3% x $750K)
when all the carryforwards run out.
Fragrantgas, this is not the way to go to cut your taxes.
If you have $250,000 to spend, you can afford to sit down
with a competent tax planning professional who can look
at your entire financial picture and run all the numbers
accurately, instead of approximately.
They can help you find other ways to reduce your taxes.
That's what they study, and research and learn how to do.
Use their expertise.
This is ill-advised - at least for tax purposes.
Good luck.
Best wishes,
Your TaxMama-ga
|
Request for Answer Clarification by
fragrantgas-ga
on
17 Jun 2005 10:31 PDT
Thank you for your quick clarification. I think we're still
miscommunicating a little bit, and I apologize if I'm not being more
specific. Let's lay all the cards on the table. I am in escrow to
purchase a piece of landlocked land for $425,000. There's a 3-year
old appraisal that values the land at $1,500,000 if it has legal
access. The neighboring parcel (the one to grant access) is a
university. The university wants the land as a donation and will
honor the highest appraised value. In addition, the university will
record an easement, thereby making the land accessible and the
appraised value justified, if the parcel is donated back to the
university. I am negotiating with someone who just sold a lot of
stock and has tremendous short term capital gains.
Here's the exact question that needs to be answered:
Assuming this property can be donated for $3,000,000, what is the cash
value to someone who has $5,000,000 in capital gains due to a stock
sale? I'm hoping it's higher than my purchase price, which by the
way, I will never take title to the land. I will simply assign my
contract to this buyer.
|
Clarification of Answer by
taxmama-ga
on
17 Jun 2005 11:47 PDT
Hi Fragrantgas-ga
Ah...this is a whole different ball game.
But, again without the specific numbers comprising his
tax return, there's not way for me to give you an answer.
He REALLY has to have someone run the numbers for him. Why?
1) With income that high, his itemized deductions limitations kicks in.
So, he'll lose the benefit of a big chunk of his potential donation.
And I don't think that part will carry over to the following year.
That deduction might just be treated as being taken in the current year.
2) Alternative minimum taxes will kick in. So, no matter how high his
donation deduction, and other deductions might be, the alternative minimum
tax will override it.
In a perfect world, without those other limitations, if he held it for
on year before making the donation, he'd be getting a $3,000,000 deduction,
limited to 30% of the AGI each year.
So in the year where his capital gains are $5MM, he'd be able to deduct
30%, or $1,500,000.
But with ALT MIN and the itemized deductions limitations, that won't happen.
I know you anxiously need an answer.
Here's a quickie help for you.
TurboTax has a Tax Estimator here:
http://turbotax.com/tax_tips_and_resources/index.html?source=ttcom4home1&ttid=ttheeader
Plug in the numbers that he expects to appear on his WHOLE tax return.
Not just related to the capital gains and this donation.
That will give you some idea.
BUT, and this is critical, have someone research this transaction
carefully and give you a written opinion. Pay a CPA, EA or Attorney
for a written opinion. You're going to have a big issue with the
value of that easement. You need to be absolutely certain of the
tax effect that will have. (Read my earlier notes).
You didn't know about this lack of easement before you opened escrow?
Ah, you thought it was a challenge you could rise above!
Good luck with this.
This isn't the place to get a solid answer for something
that will be this touchy.
You don't realize it, but IRS is on the warpath about
similar kinds of transaction. They have a serious task force
working on donation deductions created by people granting
easments and/or land to nature conservancies.
http://accounting.smartpros.com/x48544.xml
Be very, very careful with this.
This is a big enough donation that I guarantee
you it will be audited by IRS. Especially now.
Pay the pros. Get in writing. Get it done right.
Got to run now.
Best wishes,
Your TaxMama-ga
donations deduction
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