Bargain Sale
What is it?
Sale for less than fair market value
Can be for cash or installment note
Can be for like-kind property of lesser value
Transfer of property with indebtedness
Bargain Sale to Charity
Donor transfers residence with $500,000 FMV and
adjusted basis of $100,000
Bargain Sale price of property is $125,000
What about Basis?
Effect of Basis Allocation
$500,000 FMV, $100,000 Basis, $125,000 Sale
Total Sale Portion Gift Portion
Value $500,000 $125,000 $375,000
Basis $100,000 $25,000 75,000
Gain $400,000 $100,000 $300,000
Effect of Basis Allocation
$500,000 FMV, $500,000 Basis, $125,000 Sale
Total Sale Portion Gift Portion
Value $500,000 $125,000 $375,000
Basis $500,000 $125,000 $375,000
Gain $0 $0 $0
Effect of Basis Allocation
$500,000 FMV, $0 Basis, $125,000 Sale
Total Sale Portion Gift Portion
Value $500,000 $125,000 $375,000
Basis $0 $0 0
Gain $500,000 $125,000 $375,000
Comparison
Outright Gift Bargain Sale
Proceeds $500,000 $125,000
Gain Recognize $400,000 $100,000
Deduction $375,000 $375,000
Retained $125,00 $125,000
Tax Benefit $150,000 $150,000
Cap Gains tax $60,000 $15,000
Net $215,000 $260,000
Reduction Rules Apply
The charitable deduction may be reduced if the
asset consists in part of ordinary income, is
tangible personal property not subject to a
related use by the charity, is real property subject
to ordinary-income recapture or is short-term
capital gain property.
Reduction Example
$10,000 stock purchase on January 1st
On July 1st , stock has a FMV of $50,000
Gift of $40,000 made on July 1st.
Effect of Reduction
Gift on July 1st
Total Sale Portion Gift Portion
Value $50,000 $10,000 $40,000
Basis $10,000 $2,000 $8,000
Short Term $40,000 $8,000 $32,000
Gain
Deduction reduction from $40,000 gift to $8,000 (40-32)
Long Term Capital Gains
The vast majority of bargain sales involve the purchase
by a charity of appreciated property that the donor has
held for more than one year. If the donor were to sell
the asset, then the difference between the fair market
value and the adjusted cost basis would be reported as
long-term capital gain.
With a bargain sale, the gift is the excess of fair market
value over the sale price. With respect to the taxable
sale portion, the difference between the sale price and
the allocated basis will in most cases be long-term
capital gain.
Effect of Debt
Long term Capital Gains property gifted
FMV = $25,000, Basis = $15,000 Debt = $10,000
Total Debt Gift Portion
Value $25,000 $10,000 $15,000
Basis $15,000 $6,000 $9,000
Gain $10,000 $4,000 $6,000
Reportable $4,000 gain on the transaction
Donor Motivation
Charities and staff like bargain sales
May eliminate broker fees
More Flexible Contract
Feel Good
Care should be given to record the donor’s
intent to donate the FMV of donated property
in excess of the sales proceeds.
Quiz
1. In a bargain sale, a donor sells property to a charity for less than
fair market value of the property.
2. Most bargain sales are done with long-term capital gain property.
3. By doing a bargain sale, donors can select a convenient closing date
for the sale and potentially avoid real estate agent fees.
4. Before a charity agrees to a price for the property, it should have its
own appraisal, do a title search, check for liens or taxes owed and, if
commercial property is involved, have an environmental impact survey
performed.
5. With a bargain sale, it may be possible for the donor to receive cash
from the sale without paying any capital gains tax.
6. The deduction in a bargain sale is always the excess of fair
market value over the sale price.
7. If a bargain sale is done with tangible personal property, the
deduction will always be reduced to cost basis.
8. When a bargain sale is done with a personal residence, the donor
or donors can use the full $250,000 or $500,000 home exclusion to
offset capital gain if they meet the IRS requirements.
9. In a bargain sale, the donor’s basis in the property must be
prorated between the sale portion and the gift to charity.
10. If a bargain sale produces a large deduction that the donor is not
able to use in one year, he or she can carry over the deduction for up
to five additional years.