What it means
Suppose you own land worth $100,000 and sell it to a charity for $60,000. You have received cash, so part of the deal is a sale.
The other $40,000 is a gift to the charity, which may qualify for a charitable deduction (a reduction in taxable income) if the paperwork is in order. The tax treatment splits the transaction in two.
You report a sale on the part you were paid for, and you claim a gift on the rest. Because of this split, you cannot simply deduct the full difference and also use your entire cost base against the sale price.
The key step is dividing your cost base (what you originally paid, adjusted for improvements) between the two parts. The portion allocated to the sale equals your cost base multiplied by the sale price divided by fair market value.
The remaining cost base is linked to the gift and does not reduce your gain. This structure appeals to owners of appreciated assets, such as property, shares or a business interest.
They get some cash, support a cause they care about, and may face a smaller capital gains bill than from an outright sale. The charity gets an asset at a discount, often at a price it can afford.
There are important conditions. The property must be donated to a qualifying charity, a qualified appraisal is typically required for higher-value gifts, and the deduction is subject to limits based on a percentage of income.
Rules and thresholds are set by the tax authority and change from time to time, so a tax adviser should confirm the position before any deal is signed.
In practice
Real-world examples.
Example
A retired farmer owns a field worth $300,000 that he bought decades ago for $50,000. He sells it to a land trust for $200,000 so the land stays undeveloped. He reports a gain on two thirds of the property and claims a deduction on the $100,000 difference.
Example
A founder holds a small building worth $450,000 that houses a community arts group. She sells it to the group for $250,000 so it can afford the purchase. The charity gains a permanent home and the founder receives cash plus a documented charitable gift.
Example
A family sells a collection of historic maps with a fair market value of $80,000 to a university library for $50,000. An independent appraiser supports the value, and the family keeps the appraisal on file. The tax adviser files the paperwork to claim the $30,000 gift element.
Formula
Calculation
Gift portion = Fair market value - Sale price
Cost base allocated to sale = Cost base x (Sale price / Fair market value)
Taxable gain on sale = Sale price - Cost base allocated to sale
A donor owns shares with a fair market value of $100,000 and a cost base of $40,000. She sells them to a charity for $60,000. Gift portion = 100,000 - 60,000 = $40,000. Cost base allocated to sale = 40,000 x (60,000 / 100,000) = 40,000 x 0.6 = $24,000. Taxable gain = 60,000 - 24,000 = $36,000. Without the bargain structure, an outright sale for $100,000 would have produced a gain of $60,000, so the donor reports $24,000 less gain and may also claim a deduction for the $40,000 gift, subject to limits.Case study
Seen in the real world.
Linden Foundation is a fictional charity that wanted to buy an old warehouse for a food bank. The building was worth $500,000, but the charity could raise only $320,000. The owner, a fictional entrepreneur called Mr Hargrove, had paid $200,000 for the warehouse years ago and was happy to support the cause.
In this illustrative case, he sold the warehouse for $320,000, which made $180,000 of the value a gift. His tax adviser allocated 64% of his cost base, or $128,000, to the sale and reported a gain of $192,000. The adviser arranged a qualified appraisal and filed the required forms, and the food bank opened on time.
Watch out
Common mistakes.
- Deducting the full fair market value as a gift. Only the difference between the value and the price you received counts as the gift.
- Using the entire cost base against the sale price. The cost base must be split between the sale part and the gift part.
- Skipping the appraisal and the acknowledgment from the charity. Without the right documents, the deduction can be denied.
Questions
People also ask.
Can I deduct the whole gift in one year?
Deductions are usually limited to a percentage of income, but unused amounts can often be carried forward for several years, subject to the rules.
Does the charity have to know it is a bargain sale?
Yes, the charity should acknowledge the gift in writing and state the amount paid and the value of what it received.
Is a bargain sale only for property?
It is most common with property, shares and business interests, but any asset with a measurable value can in principle be sold this way.
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