Bargain Sale To A Charitable Organization

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. In some cases, the property transferred is exchanged for other similar property of lesser value, and the difference is considered a gift.

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, where the portion of the bargain sale that is treated as a gift is equal to the excess of the fair market value of the donated item that is paid by the charitable organization. This differential “gift portion” is consequently considered to be a deductible amount, as a charitable contribution, under IRC Section 170.

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, if a taxpayer sells his or 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 an adjusted basis of $100,000. In this instance, the bargain sale rule would kick in, where the gift portion of the sale would be $100,000. Accordingly, the adjusted basis for determining gain on the bargain sale is $50,000 which is determined by this calculation: $100,000 adjusted basis × $100,000 amount realized/the $200,000 value of the property.

There are number of variables that could potentially effect 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 they achieve the dual mission of providing a charity with a good or service, while obtaining favorable tax treatment, as a result.

Internal Revenue Service Publication 526 provides information on calculating charitable contributions.