Bargain Sales
A bargain
sale occurs when a donor sells property
to WBAA Public Radio 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 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 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.
| Market
Value - Cost
Basis x
|
Selling
Price
Market Value |
=
Reportable Gain |
| $100,000
- $25,000
x |
$25,000
$100,000 |
= $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.
