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
Basis Gain
$500,000
$100,000 $400,000
$125,000
$25,000 $100,000
$375,000
75,000 $300,000
Effect of Basis Allocation
$500,000 FMV, $500,000 Basis, $125,000 Sale
Total Sale Portion Gift Portion
Value
Basis Gain
$500,000
$500,000 $0
$125,000
$125,000 $0
$375,000
$375,000 $0
Effect of Basis Allocation
$500,000 FMV, $0 Basis, $125,000 Sale
Total Sale Portion Gift Portion
Value
Basis Gain
$500,000
$0 $500,000
$125,000
$0 $125,000
$375,000
0 $375,000
Comparison
Outright Gift Proceeds $500,000 Bargain Sale $125,000
Gain Recognize $400,000 Deduction
Retained Tax Benefit Cap Gains tax Net
$100,000 $375,000
$125,000 $150,000 $15,000 $260,000
$375,000
$125,00 $150,000 $60,000 $215,000
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 Value Basis Short Term Gain $50,000 $10,000 $40,000 Sale Portion $10,000 $2,000 $8,000 Gift Portion $40,000 $8,000 $32,000
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 Value $25,000 Debt $10,000 Gift Portion $15,000
Basis
Gain
$15,000
$10,000
$6,000
$4,000
$9,000
$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.