A bargain sale occurs when a donor sells property to Good Samaritan Hospital 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.

Claire and Bob had inherited some rental property a number of years ago. At first, it was kind of fun to do the maintenance and make sure everyone was up-to-date on their payments. But it soon became work, and after Bob passed away, Claire turned to a maintenance company. But Claire's heart was not in it. Even with the maintenance company, the cost and time became a burden. She had often volunteered at the loca hospital and found that satisfying and enjoyable.

As a result, she went to her CPA and asked what her business options were. Could she sell it or perhaps give it to her local hospital? Using it as a gift appealed to her, except that they still had a $125,000 mortgage on the property that they acquired when they had to do some renovations a number of years ago. 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.

"It was a huge relief to find out that I could make a charitable gift that would help others. A bargain sale covered the mortgage and the costs involved in the sale. By gifting the property, I no longer had the worries and the hassles. And, I get an income tax deduction and see the result 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 or $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.

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.

Please note that we use pop-up windows for some of our links. If you have pop-ups blocked, holding down the CTRL key (or sometimes the SHIFT key) while clicking on these links will often allow the pages to open without having to disable pop-up blocking on your computer.

Please note, individual financial circumstances will vary. The information on this site does not constitute legal or tax advice. Donor stories and photographs are for purposes of illustration only. As with all tax and estate planning, please consult your attorney or estate specialist. All material is copyrighted and is for viewing purposes only. Use of this site signifies your agreement with the terms of use. The content in this Gift Planning section has been developed for Good Samaritan Hospital Foundation by Future Focus. Please report any problems to section webmaster. Revised: March 10, 2009 17:38.