How bargain sales work — in plain language

A bargain sale combines a sale and a charitable gift in one transaction. You transfer property (real estate, art, closely held business interests, etc.) to a 501(c)(3) organization and receive cash (or other consideration) that is less than the property’s fair market value (FMV). The difference between FMV and the payment is treated as a charitable contribution for federal income-tax purposes, with the sale portion treated like a taxable disposition.

Example (illustrative):

  • Fair market value (FMV) of property: $300,000
  • Sale price to charity: $200,000
  • Charitable contribution: $100,000 (FMV minus sale price)

You typically report the sale portion on your tax return and claim the charitable portion as an itemized deduction, subject to the normal non‑cash contribution rules and limits.

(For official guidance see IRS, Charitable Contributions and bargain sales: https://www.irs.gov/charities-non-profits/charitable-contributions.)

Opportunities: Why clients use bargain sales

  • Tax-efficient giving while keeping cash: You receive immediate cash from the sale while creating a deductible gift for the difference. This can be useful when you want liquidity but also want to make a substantial charitable gift.

  • Reduce carrying costs and liabilities: Donating an underperforming rental or land with holding costs can offload ongoing expenses while still benefiting your chosen charity.

  • Philanthropic impact with tax benefit: Compared with an all-cash donation, a bargain sale can increase the charitable impact without requiring the full gift amount in cash.

  • Estate and succession planning tool: Bargain sales may be used as part of a broader wealth-transfer plan to reduce taxable estate or to move harder-to-liquidate assets out of your estate.

In my practice I’ve seen clients use bargain sales to move unwanted real estate (with deferred maintenance or thin markets) to local nonprofits, converting illiquid holdings into cash while still taking a meaningful deduction.

Major pitfalls and traps to avoid

  • Valuation risk: The IRS expects a defensible FMV. If the IRS disagrees with your valuation, it can deny the deduction. Always obtain and retain a qualified appraisal when required (see below).

  • Documentation failures: Missing or incomplete records — deed transfers, closing statements, receipt from the charity, or a qualified appraisal — lead to audit risk and possible disallowance.

  • Overlooking the tax on the sale portion: The amount you receive for the sale is taxable to the extent it exceeds your basis. A bargain sale does not eliminate capital gains; it allocates the transaction between taxable sale and charitable gift.

  • Contribution limits and carryover: The deductible portion is subject to AGI percentage limits for non‑cash gifts. If your deduction exceeds limits you may have to carry it forward up to five years, but only with correct substantiation.

  • Charity’s capacity and willingness: Not every nonprofit accepts bargain sales — handling title, clean-up, or resale can be a burden. Confirm the charity’s acceptance policy in writing before proceeding.

  • Unclear use of property by the charity: If the charity does not use the property for a related exempt purpose, special rules can affect the deductibility or the charity’s tax treatment when it resells the property.

  • State tax and property tax issues: State-level income- or property-tax rules can differ; some states may not follow federal deduction treatment.

IRS reporting and appraisal rules (practical checklist)

  • Form 8283: File IRS Form 8283, Noncash Charitable Contributions, to report the donated portion of the transaction. Parts of Form 8283 require the charity’s signature and appraisal summary for larger gifts.

  • Qualified appraisal: The IRS requires a qualified appraisal for noncash contributions with claimed value over $5,000. The appraiser must meet IRS rules for qualifications and independence (see IRS Publication 561, Determining the Value of Donated Property).

  • Contemporaneous written acknowledgment: Obtain an acknowledgment from the charity that states the amount of cash received and a description of the property transferred. This is required to substantiate the charitable contribution.

  • Record the split: Keep documentation that clearly shows how you allocated the transaction between sale proceeds (taxable) and the charitable gift (deductible). The closing statement and written agreement with the charity should reflect this split.

Authoritative references: IRS Publication 526 (Charitable Contributions), Publication 561 (Valuation), and the Form 8283 instructions. See https://www.irs.gov/forms-pubs/about-form-8283 and https://www.irs.gov/charities-non-profits/charitable-contributions.

How tax treatment typically breaks down

  • Sale portion: Report as a sale of property. If the asset was a capital asset, you may recognize capital gain equal to the sale price allocated to the sale portion minus your basis attributable to that portion.

  • Charitable portion: Treated as a noncash charitable contribution. If it is an appreciated capital asset, the charitable deduction may be limited to the FMV of the donated portion subject to AGI percentage limits for contributions of appreciated property to public charities.

Because the tax character can be complex (e.g., ordinary income property vs. capital gain property, short‑term vs. long‑term holdings), work with a CPA or tax attorney to model the after‑tax outcome before you commit. IRS guidance on noncash contributions and deduction limits is in Pub 526 and related materials.

Practical steps to execute a compliant bargain sale

  1. Confirm the charity: Be certain the recipient is an eligible 501(c)(3) and confirm in writing that it will accept a bargain sale and the property type.
  2. Get a quality appraisal: Engage a qualified, independent appraiser early — the appraisal supports FMV and the deduction portion.
  3. Negotiate and document terms: Put the sale price, closing mechanics, responsibility for repairs, and allocation between sale and gift in a written agreement.
  4. Consider timing and basis allocation: Plan the timing to manage recognition of gain and deduction limits; understand your tax basis and how to allocate it between the sale portion and the donated portion.
  5. File required forms and keep records: Prepare Form 8283, retain the appraisal, get the charity’s written acknowledgment, and maintain closing statements.
  6. Consult counsel for complex assets: Closely held business interests, conservation easements, or assets with encumbrances can have special rules. Seek legal and tax advice.

Common questions I hear from clients

  • Who pays closing costs and liabilities? Typically negotiated in the sale agreement. Charities may ask sellers to clear title or cover environmental remediation costs — budget for this possibility.

  • Can I carry forward an unused deduction? Yes, subject to IRS carryforward rules for charitable contributions (generally up to five years) but follow the specific limits and substantiation requirements.

  • Do I need to worry about private foundation rules? Yes — if the recipient is a private foundation different deduction limits and excise taxes may apply. Confirm the organization’s public charity status.

When a bargain sale is a bad idea

  • The asset produces higher tax savings if donated outright (for long‑term appreciated, publicly traded securities, a direct gift often produces a larger tax benefit).
  • The charity cannot or will not accept the property without expensive cleanup or legal risk.
  • Expected capital-gains tax on the sale portion outweighs the value of the charitable deduction.

If these flags appear, consider alternatives such as an outright gift, contributing the asset to a donor‑advised fund, or using an installment sale or charitable remainder trust — each has different tax and cash-flow profiles.

(See our related guides on tax-efficient ways to donate real estate and non-cash donations: “Tax-Efficient Ways to Donate Real Estate” and “Non-Cash Donations: Donating Real Estate and Appreciated Assets”.)

Final thoughts and professional disclaimer

Bargain sales to charity can be powerful — they combine liquidity with philanthropy and can lower taxes — but they require careful valuation, documentation, and planning. In my experience advising clients, the transactions that succeed are the ones with early communication with the receiving charity, a qualified appraisal, and tax modeling done before execution.

This article is educational and not individualized tax advice. Consult a licensed tax professional or attorney to evaluate your specific situation and to prepare required filings. For official IRS guidance see Publication 526 and the Form 8283 instructions at the IRS website (https://www.irs.gov/).

References and further reading

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