Goal: Reduce capital gains on appreciated property
Benefit: Cash to pay off mortgage or other loans and charitable tax deduction for the gift portion
A bargain sale occurs when a donor sells property
to Providence Health Care Foundation, Eastern Washington 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
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
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.
"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
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.
Value - Cost Basis x
$100,000 - $25,000
| = $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.
Return to Legacy Gift Options.