ArcaMax

Dear Monty: We own some vacant land a nonprofit wants to purchase. Their agent has told us that he can structure the contract to survey the land and divide it in half. They would pay us double the fair market value (FMV) for one half, and we would then donate the other half for $1. He called it a "bargain sale." We would then have a tax advantage from donating half the property to help offset the gains from selling the other half. Our CPA tells us that if the same buyer acquires all the property for FMV, there is no bargain sale or tax advantage. Is this legitimate? Is there any other way the sale could be structured to give us a tax advantage?

Monty's Answer: When it comes to charitable property donations combined with sales, the details and structure of the transaction are crucial for both legal compliance and tax advantages. Here are some options to consider:

The agent's proposed structure raises several red flags. In essence, it suggests artificially splitting a single transaction into two parts -- a sale above market value and a donation -- to create a tax benefit. The IRS generally looks at the substance of transactions over their form, particularly when related parties and charitable contributions are involved.

Your CPA's assessment aligns with standard tax principles. When a single buyer acquires an entire property in a coordinated transaction, the IRS typically views this as one unified transaction rather than separate events. The fact that the nonprofit would pay double the FMV for half the property suggests this is an attempt to recharacterize a single transaction at FMV.

However, there are legitimate ways to structure property transactions with nonprofits that can provide tax advantages. A genuine bargain sale occurs when you sell the property to a qualified charity for less than its FMV. The difference between the FMV and the sale price is considered a charitable contribution. The key is that this must be a genuine bargain sale, not an artificially structured transaction where you receive full value through other means.

Alternative structures worth considering include:

No. 1: A direct sale at FMV with a separate cash donation to the charity keeps the transactions separate and provides a straightforward charitable deduction.

No. 2: Granting a conservation easement on the property before selling it could provide a charitable deduction, reducing the property value while allowing you to sell the restricted property.

No. 3: Contributing the property to a charitable remainder trust could provide income and tax benefits.

These alternatives should be carefully evaluated by qualified tax and legal advisers who can assess your situation and goals. The key is to ensure any transaction is structured with genuine economic substance and legitimate charitable intent.

It's worth noting that property transactions involving charities receive heightened scrutiny from the IRS, mainly when they involve complex structures or appear designed primarily for tax advantages. Working with experienced professionals who understand both real estate and tax law is essential to ensure compliance.

Before proceeding with any structure, obtain written opinions from qualified tax counsel and consider requesting an IRS private letter ruling for significant transactions to ensure your planned approach will be respected.

Richard Montgomery is a syndicated columnist, published author, retired real estate executive, serial entrepreneur and the founder of DearMonty.com and PropBox, Inc. He provides consumers with options to real estate issues. Follow him on Twitter (X) @dearmonty or DearMonty.com.

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