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.

Bargain sales are often used by donors who wish to make a charitable donation to an organization in a form other than cash. A 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.

Understanding a Bargain Sale to a Charitable Organization

If the property being 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 tax deductible as a 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 his or her intent to make a charitable gift prior to the transaction and the transaction must produce a charitable contribution income tax deduction under the Internal Revenue Code.

For example, a taxpayer sells his or her 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. 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.

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