A “bargain sale” might make sense in appropriate circumstances.
Suppose you own a valuable piece of artwork that a museum would like to acquire. Perhaps you would like to sell your asset to raise cash, but you’re also sympathetic to the charity’s desire to acquire and preserve your treasure.
Maybe the charity is willing to purchase the asset from you, but it cannot afford to pay the full appraised value. A bargain sale might benefit all parties.
When property is transferred to a charity in return for consideration totaling less than the property’s fair market value, the transaction is divided:
- To the extent that consideration is received, the transaction is treated as a sale, resulting in a gain or loss.
- To the extent that the fair market value of the property exceeds the consideration, the transaction is treated as a gift, resulting in a charitable deduction.
Consider some vacant land you acquired years ago for $20,000. Recently, a developer offered you $100,000 for it. Your town would like to acquire the land to preserve “open space” but cannot afford to pay full value. If you sell the land to the town for, say $80,000, you have made two transactions:
1. A sale of 80 percent ($80,000/$100,000) of the property, resulting in a gain of $64,000 ($80,000 selling price less $16,000, which is 80 percent of your basis)
2. A gift of 20 percent of the property, resulting in a charitable contribution deduction for $20,000 ($100,000 – $80,000)
Note that the same result could be obtained by first borrowing $80,000 against the property and then giving the property to the town, with the town assuming the obligation to repay the loan. This transaction may be advisable when the recipient is agreeable but does not have the cash you require.