IRS Section 170 Bargain SaleOver the past 100 years, the IRS and the US Government have encouraged the donation of cash and assets to non-profits of all kinds……so they don’t have to! This encouragement came in the form of tax deductions and other benefits, but mainly a charitable tax deduction. Various caps on the amount as a percentage of income have been thrown around but we have been at 30% of AGI (“Adjusted Gross Income”) for over 30 years now.

Historically the government has also allowed other deductions which competed for “space” with charitable donations including mortgage interest and state taxes, to name a couple. However, in December 2017 the US Government decided to change some of those rules. A big one being the deductibility of state taxes from federal taxes. The matter at hand: Previously when you sold real estate, your state taxes for proceeds was deductible from your federal taxes; as of 2018, these taxes are no longer deductible. Obviously, you should confirm your situation with your CPA, but this is the essence.

Subsequently, the proceeds from a traditional cash transaction from a real estate sale are subject to that additional portion of taxes that were previously deductible from federal taxes (i.e. state taxes). Depending on where you live, that can vary from a couple of percentage points up to 5 or 6% in states like California. Again, check with your CPA for your situation (for example, this does apply to tax free states like Florida). The benefit here is that if you sell your asset via a Bargain Sale, you still can use the charitable deduction portion against your federal taxes thereby avoiding state taxes and any lack of state tax “deductibility”.