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A bargain sale to a charitable organization occurs when you sell property to a qualified nonprofit for less than its fair market value. The difference between the market value and the sale price is treated as a charitable contribution. You receive cash for the portion you sell and a potential tax deduction for the portion you give away. It is a way to convert appreciated property into both liquidity and a charitable deduction at the same time.
Think of it as splitting a single asset into two parts: one part you sell for cash, and one part you donate.
A bargain sale creates both a taxable gain and a charitable deduction in the same transaction. You must account for both separately.
The taxable gain is calculated on the portion of the property you actually sell. To find your basis for that portion, you allocate your total adjusted basis across the two parts using a ratio. Your allocated basis equals your total adjusted basis multiplied by the ratio of the sale price to the full fair market value. Your gain is the sale price minus that allocated basis.
The charitable deduction equals the full fair market value minus the sale price, provided the property meets the requirements for a deductible contribution. The deduction is generally subject to the same percentage-of-adjusted-gross-income limits that apply to outright gifts of appreciated property, typically 30% of adjusted gross income for long-term capital gain property donated to a public charity.
You own real estate with an adjusted basis of $250,000 and a current fair market value of $1,250,000. You sell it to a university for $250,000, which is only 20% of its value.
Your charitable contribution is $1,000,000 ($1,250,000 minus $250,000). Your allocated basis for the sale portion is $50,000 ($250,000 total basis multiplied by $250,000 sale price divided by $1,250,000 fair market value). Your capital gain is $200,000 ($250,000 sale price minus $50,000 allocated basis). You report the $200,000 gain in the year of sale and claim the $1,000,000 charitable deduction, subject to applicable limits and carry-forward rules.
Not every below-market sale to a charity qualifies for a deduction. The property must be sold to a qualified organization under Section 501(c)(3) of the Internal Revenue Code, and you must have "donative intent," meaning a genuine charitable motive for the below-market price.
For property valued above $5,000, you must obtain a qualified independent appraisal and attach Form 8283 to your tax return. The bargain element does not eliminate this requirement. If the property was worth $12,000,000 or more, or involves gifts to private foundations with restrictions, additional complexity applies.
This strategy is most useful when you own property that has appreciated significantly, you need cash but cannot afford to give the entire asset away, and you want to reduce your capital gains exposure while still benefiting a charity.
If you would recognize ordinary income from selling the property at fair market value (for example, because it is inventory or short-term gain property), the charitable deduction may be reduced or eliminated. Your tax situation before pursuing a bargain sale deserves careful review with a qualified tax professional.
Document the fair market value at the time of the transaction, your donative intent, and the sale price. The purchase and sale agreement should reflect both the market value and the charitable nature of the discounted price. Failure to document the transaction properly is the most common reason the IRS disallows the deduction entirely.
Sources:
https://www.irs.gov/publications/p526
https://www.law.cornell.edu/cfr/text/26/1.1011-2
https://www.thetaxadviser.com/issues/2022/aug/bargain-sales-charities/
https://www.cl-law.com/news-events/bargain-sales-to-charities-charitable-deductions-and-capital-gains-savings
https://irstaxtrouble.com/charitable-tax-deductions-bargain-sales/
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