Alice and Debbie bought property on a lake many years ago. They planned to build a second home so that their family could spend their summers on the lake.
Alice: Over the years, the lot increased in value. We paid $40,000 for it. It's now worth $500,000.
Debbie: We were ready to sell the property, and we wanted to avoid paying so much in capital gains tax on the sale.
Alice: We consulted a friend who is a CPA. She said if we donated a part of the property to charity BEFORE we sold it, we could eliminate the capital gains tax we would have to pay on the sale.
After talking to their tax advisor, Alice and Debbie learned if they gave a 25% interest in the property to charity, they would receive two big benefits. First, they would receive an income tax deduction for the value of the gift. Second, they would avoid capital gains tax on the portion of the property they gave to charity.
Debbie: That's what we decided to do. We gave a 25% interest in the property prior to the sale to charity. We saved the capital gains tax on that part. The income tax deduction we received for this gift offset a large portion of the tax we had to pay on the $375,000 we received when we sold the lot. Instead of paying so much in taxes, we were able to give $125,000 to our favorite charity.
Is a part gift and part sale right for you?
A part gift and part sale of an appreciated asset is an excellent tax strategy. You can use the deduction from the gift portion to offset the capital gains from the sale portion of the transaction.
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