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Q.: What is a bargain sale?

Q.: What is a bargain sale?

A.: A useful charitable giving tool/technique.

Bargain sales defined

Bargain sales can be a useful charitable giving tool/technique. A bargain sale is a transaction in which a donor receives less than full market value of property transferred to the charity. The transaction is treated as part sale, part gift, with the donor’s basis allocated proportionally between the gift amount and the sale amount.

Simple example of a bargain sale

Let’s take a simple example. Assume Jill Donor owns real estate worth $1 million, for which she paid $200,000 years ago. Jill sells the land to her local community foundation for $500,000, and starts her own donor advised fund. Jill then makes a gift of the difference ($500,000) between the sale price and the fair market value of the farmland. Jill must pay tax on the gain element, but may receive a charitable deduction on the gift element.

The total basis of $200,000 is allocated between the gift and sale portions. Since Jill sold the land for half price of FMV, the basis is allocated 50/50. Therefore, the allocated basis is $100,000. The gain, then, is $400,000; assuming the top capital gain tax rate of 20%, this would mean $80,000 of cap. gains tax due. But Jill also avoided another $80,000 of cap. gains tax by the bargain sale of the property.

The net result in this simple example is positive for Jill. Again, Jill received $500,000 in cash. But she also may receive a charitable deduction for having gifted $500,000. The charitable deduction at, say, the top rate of income taxation, 39.6%, would be $198,000. One way to look at this entire transaction is that Jill received $500,000, paid $80,000 in cap. gains taxes, but received a $198,000 deduction, meaning a net of positive cash flow of $618,000 to Jill.

Cautionary note

Remember, all Iowans are unique and have unique legal and tax issues. Consult your own professional advisor for personal advice.