To return to the main Foundation website, please close this browser window.
Goal: Reduce capital gains on appreciated property
Benefit: Cash to pay off mortgage or other loans and charitable tax deduction for the gift portion
Intensive Care Unit
A bargain sale occurs
when a donor sells property to the Foundation of Mon General 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
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 they 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.
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
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.
|Market Value - Cost
| = Reportable
|$100,000 - $25,000 x
| = $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.