If you sell property to a charity at a discount, you may qualify for the charitable contribution deduction.
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This post is provided for general information only. Please confirm the details and circumstances of your unique situation with your tax accountant or other appropriate advisor before taking action.
What is a bargain sale?
A bargain sale is a sale where you sell property to a charity at well below its fair market value. The most common type of bargain sale is a real estate sale, but it can be any type of property.
For example, you own a home worth $500,000 and sell it to a charity for $100,000. That’s a bargain sale.
A bargain sale can also include a trade where the property you receive in return has a lower value than the property you give.
How much is the tax deduction for a bargain sale?
The tax deduction for a bargain sale is usually equal to the amount of the bargain. For example, if you sell for $100,000 below market value, you can typically deduct $100,000.
Keep in mind that the usual charitable contribution rules and limits apply. A large bargain may exceed your annual limit, in which case you may need to carry some of your deduction over to next year.
What if you owe taxes on the sale?
A bargain sale can still result in capital gains taxes. This will generally be in proportion to the property’s fair market value.
For example, if you sell a piece of real estate for 50% of fair market value, you’ll generally pay taxes on 50% of the capital gain.
In other words, you bought a house for $100,000 and sold it to a charity for $250,000 when it was worth $500,000. In a normal cash sale, you would have had a $400,000 realized gain. Since you sold it for half the value, your gain realized is only $200,000.
What if the charity assumes a mortgage or other debt?
If a charity assumes a mortgage or other debt as part of the bargain sale, the assumed debt is part of the purchase price. For example, if the charity paid $100,000 cash and assumed a $100,000 mortgage, the purchase price is $200,000. Your deduction is the difference between $200,000 and the fair market value.
How do you determine fair market value?
When you make a bargain sale, you will usually need to get an appraisal if the deduction amount will be $5,000 or more.
The appraisal generally needs to be done by a qualified appraiser no earlier than 60 days before the date of the bargain sale and no later than the date of the bargain sale. In addition, the appraiser’s fee can’t be based on a percentage of the property value.
You should keep a copy of your appraisal in your tax records. For some very large deductions, you may be required to attach a copy of your appraisal to your tax return. See IRS Form 8283.