Bargain Sale to a Charitable Organization

What Is a Bargain Sale to a Charitable Organization?

A bargain sale to a charitable organization is the sale of a good or service to a charitable organization for less than the fair market value of the good or service received. Donors often who wish to make a charitable donation to an organization in a form other than cash often use bargain sales.

One very common example of a bargain sale to a charitable organization is the sale of real estate to a charity. In many cases, the property transferred is exchanged for other similar property of lesser value, and the difference is considered a gift.

Key Takeaways

  • A bargain sale to a charitable organization is the sale of a good or service to a charity for an amount less than the fair market value.
  • A common bargain sale is a transfer of real estate to a charity.
  • A bargain sale reduces the tax liability of the donating party because it is considered a tax-deductible sale.

Understanding a Bargain Sale to a Charitable Organization

If the property sold has appreciated in value, the cost basis must be divided proportionately between the portion of the property that is actually sold and the remainder that is donated. The gain on the portion of the property that is sold must then be reported as income. The donation portion is written off within the limits of charitable contributions for appreciated property.

A bargain sale transaction typically reduces the tax liability of the donating party. The portion of the sale that is considered a gift is equal to the excess of the fair market value of the donated item over the price paid by the charitable organization. This differential “gift piece” is consequently a tax-deductible charitable contribution.

Qualifications for a Bargain Sale to a Charitable Organization

For a transaction to qualify for bargain sale treatment, the donor or seller must declare their intent to make a charitable gift before the transaction, and the transaction must produce a charitable contribution income tax deduction under the Internal Revenue Code.

For example, a taxpayer sells their property to a charitable organization for $100,000, but at the time of the transaction, the fair market value of the property in question is $200,000, and $100,000 is the adjusted basis of the entire property. In this instance, the bargain sale rule would kick in because the price the charity paid was less than the fair market value.

Accordingly, the adjusted basis for determining the gain on the bargain sale is $50,000, which is determined by this calculation:

  • $100,000 purchase price / $200,000 fair market value x $100,000 adjusted basis = adjusted basis for determining the gain

A number of variables could potentially affect the taxable outcome that results from making a bargain sale to a charitable organization, so it is advised that the donating party consult a qualified tax preparer to make sure they achieve the dual mission of providing a charity with a good or service while obtaining favorable tax treatment.

What Is a Bargain Sale to a Charitable Organization?

A bargain sale to a charitable organization happens when a person who wants to make a non-cash charitable donation sells a good or service to the organization at less than its fair market value. The difference in price constitutes the donation.

Must It Always Be in the Form of a Sale?

Not always. A donor could sign over a real estate property in exchange for the charity signing over another property it owns to the donor. As long as the donor’s property was worth more than the charity’s, the exchange would constitute a bargain sale.

Is the Donation Generated by a Bargain Sale a Tax-Deductible Donation?

Yes, it can be, but it is governed by certain rules. For instance, if a sold property has appreciated in value since the seller acquired it, the cost basis must be divided proportionately between the part that is sold and the part that is donated. The Internal Revenue Code spells out how to do this in order to qualify for a tax deduction.

Article Sources
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  1. Internal Revenue Service. "Publication 526: Charitable Contributions," Pages 13–14.

  2. Internal Revenue Service. "Publication 544: Sales and Other Dispositions of Assets," Page 4.

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