The words “bargain sale” are magical to almost every consumer, but are they a good deal for nonprofits and donors?
A bargain sale is the sale of an asset to a charity at less than fair market value. Or, as Russell James, J.D., Ph.D., professor and CH Foundation Chair in Personal Financial Planning at Texas Tech University, explains in Visual Planned Giving, you might think of a bargain sale as a special form of charitable gift where the donor makes a gift but also receives money or other valuable property back from the charity in exchange for the gift.
And, the tax deduction? Donors deduct the value of what they gave less the value of what they received from the charity in exchange for the gift. For example, suppose a charity wants land owned by a donor that is worth $1 million. The donor offers a lower price to benefit the charity and sells the land to the organization for $400,000. In this case, the donor has made a $600,000 charitable gift ($1 million land given to charity less the $400,000 payment received from charity).
Understanding the tax consequences of bargain sale gifts serves two purposes:
1. Traditional bargain sales can be a useful charitable planning device. A bargain sale gift can result in lower capital gains taxes compared with selling at fair market value and then making a gift to a charity from the proceeds of the sale.
2. Other types of more complex charitable planning, such as charitable gift annuities, are forms of bargain sales. Consequently, understanding the tax rules for bargain sale gifts will help you understand the tax consequences for such more complex transactions. The same principles will continue to apply.
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