|
Monday, May 6, 2024
 |
Case Studies |
Gift of an Installment Note To Charity
|
Case:
Ashley White, 77, owned much of the land surrounding a local private university located in a small rural town. Three years ago, the university gained national recognition when a popular magazine named it one of the top 50 schools in the country. As a result, the student body grew quite rapidly as students were drawn to the university and its program. Not surprisingly, the university sought to expand its campus to accommodate this new growth. The university approached Ashley about making a gift of her land to the university, but she was not very receptive to the idea. She did agree to sell her land to the university on a 10-year installment note. The land was valued at $1 million and had a cost basis of $100,000. The university agreed and the transaction was completed.
Five years have now passed and it seems that Ashley is having a change of heart. At the age of 82 and with a $6 million estate, Ashley is financially secure. More important, she is seeking ways to leave a legacy. Through informal conversations with the university, Ashley knows that a gift of $500,000 or more would qualify her as a major donor and would put her name on one of the newly constructed buildings. Thus, she would like to "forgive" the remaining five years on the installment note (approximately $500,000) as her contribution to the university.
Question:
Can Ashley "forgive" the note and what are the tax consequences of such "forgiveness?"
Solution:
Ashley's forgiveness of the note would unfortunately trigger the remaining capital gain in the installment note. Therefore, Ashley would have to report on her return approximately $450,000 of capital gain ($900,000 total capital gain, of which she had already reported $450,000 over the first five years).
However, Ashley would also be entitled to a charitable contribution for the value of her gift, $500,000, which would be treated as a cash-type gift subject to the 50% AGI limitations. It is treated as a cash type gift because there is no longer any appreciation aspect to the property (i.e., she paid all the capital gains taxes). Therefore, Ashley may be able to use her $500,000 charitable income tax deduction to offset her $450,000 of capital gain income.
Ashley has $150,000 of other income each year, which puts her AGI at $600,000 this year. With the 50% limitation, this allows her to take a $300,000 deduction this year. She can carry forward the remaining $200,000 over up to five more years to offset her annual income of $150,000.
Ashley finds this tax result acceptable and moves forward with the gift. Her real joy, however, comes from the fact that she is able to leave a substantial gift that will remain many many years after she is gone.
|
|
|
|
