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A bargain sale occurs
when a donor sells property to FirstHealth
for less than the property’s fair
market value. The amount of fair market
value over the sales price is the
donor’s charitable contribution, which
may be reduced by allocation of tax
basis and reduction rules relating
to unrealized gain. Almost any type
of asset may be sold in a bargain
sale, depending on the cash available
for purchase and the suitability of
the asset.
 What
are the advantages? The charitable
contribution portion qualifies for
income tax deduction. It may be carried
forward for five years if not fully
usable in year of gift, and it allows
the donor to receive some cash sales
proceeds while making a charitable
gift. A bargain sale may avoid capital
gain tax liability on highly appreciated
property.
Elizabeth and Ken had acquired some
property as an investment that they
were renting out. Ken had always taken
care of the management and maintenance;
but since he passed away, it had become
a burden for Elizabeth. As much as
she enjoyed working in her backyard,
the idea of hiring and monitoring
workers for the rental property didn't
appeal to her.
As a result, she asked her CPA about
selling it or perhaps giving it to
her favorite charity. Using it as
a gift appealed to her except that
she still had a $125,000 mortgage
on the property. Her CPA did the calculations
and found out that a bargain sale
allowing her enough to pay off the
mortgage and other closing costs would
still provide her with a generous
income tax deduction that would more
than offset the capital gain tax due.
"This was very much a win
- win solution for me. By making sure
that the mortgage and the selling
costs were covered, I was free to
donate the property. I also was able
to take a burden off my shoulders
and not have to worry about all the
details anymore. I get an income tax
deduction, and I get to see the impact
of my gift today.
The capital gain portion
of a bargain sale is a little tricky.
Even if the donor proceeds are equal
or less than the asset's cost, there
is an allocation of gain formula that
needs to account for the gain. Basically,
the market value minus the cost is
multiplied by the selling price divided
by the market value. For example,
an art museum acquires a painting
worth $100,000 from a donor for the
donor's cost of $25,000. The reportable
gain is then calculated by subtracting
cost basis ($25,000) from market value
($100,000). which equals $75,000,
and multiplying that times the selling
price ($25,000) divided by the market
value ($100,000) or .25. The result
is a gain of $18,750.
| Market
Value - Cost
Basis x
|
Selling
Price =
Reportable Gain |
|
Market
Value |
| $100,000
- $25,000
x |
$25,000
= $18,750 |
|
$100,000
|
In this example, the
donor will report a long-term capital
gain of $18,750 (assuming a holding
period that qualifies as long term)
and simultaneously has a federal income
tax deduction on the gift portion
of the bargain sale of $75,000.
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