Donating Part Of Home
Subject: Tax QuestionDear Kerry,
I have friends that want to sale their residence valued at $1.5 million. They also want to make a contribution to a charity of approximately $500,000. They are wondering if they can donate 1/3 of the residence to charity before it is sold. Then after the home is sold and they get $1 million for their 2/3 share of the residence, still deduct the $500,000 exclusion for sale of a partial interest of a residence. Your thoughts are appreciated.
Such a plan could be possible, with proper documentation, including an IRS approved appraisal of the value of the partial interest.
However, such a plan might not work out to give your friends the lowest tax. It could very well work out that having them sell the home as 100% owners and then donate $500,000 cash would have a smaller bottom line than the scenario you are proposing. Long term capital gains are taxed at a much lower rate than is ordinary income.
Their personal tax professional should run the numbers under both scenarios. It could end up showing that a $500,000 cash donation saves them more ordinary income tax than the extra capital gains tax on $500,000 additional taxable profit from their residence sale.
Of course, with numbers that large, all kinds of other factors will kick in, including the insane AMT and phase-outs of deductions and exemptions. The only way to get a decent handle on the figures is with a good tax software program, which their personal tax professional should have.