Bargain Sale to Charity

A bargain sale to charity is a hybrid transaction in which you sell appreciated property to a qualified charity for less than its fair-market value, splitting the deal into a partial gift and a partial sale. You receive a charitable deduction for the gift portion, but you owe capital gains tax on the sale portion — a technique that lets donors unlock liquidity while preserving some tax relief.

The split-transaction doctrine

The IRS treats a bargain sale as two economically distinct events. Suppose you own land with a fair-market value of $100,000 and a cost basis of $30,000. You sell it to a qualified charity for $60,000. The difference between fair value and the sale price — $40,000 — is a charitable gift. But you have sold property at $60,000, which is above your cost basis, so you owe capital gains tax on the gain attributable to the sale portion.

To calculate the taxable gain, the IRS allocates cost basis between the sale portion and the gift portion proportionally. In this example:

• Sale portion: $60,000 of the fair value
• Gift portion: $40,000 of the fair value
• Total FMV: $100,000

Your $30,000 cost basis is split in the same proportion:

• Cost basis allocable to sale: ($60,000 ÷ $100,000) × $30,000 = $18,000
• Cost basis allocable to gift: ($40,000 ÷ $100,000) × $30,000 = $12,000

Your taxable gain on the sale is therefore $60,000 – $18,000 = $42,000. You owe capital gains tax on $42,000. Your charitable deduction is $40,000 (the fair-market value of the gift portion).

Why use a bargain sale instead of donating outright?

If you simply donated the land, you would have a charitable deduction of $100,000 (the full fair-market value), but you would receive no cash. A bargain sale lets you walk away with $60,000 in cash to reinvest, diversify, or spend, while still claiming a substantial deduction for the gift portion. This is particularly useful when a donor needs liquidity but also wants to support a charity.

The trade-off is clear: you pay capital gains tax on a larger portion of your gain than you would if you sold the property at fair value to an unrelated party. If you sold at fair value to a private buyer, you would owe capital gains tax on the entire $70,000 gain. With the bargain sale, you owe tax on only the $42,000 gain attributable to the sale portion. That is a real tax saving, because you escape capital gains tax on the $12,000 basis allocable to the gift portion.

Charitable deduction limits and carryforward

The charitable deduction on a bargain sale is subject to AGI percentage limitations. For cash gifts, the limit is 50% of AGI in most cases. For appreciated long-term capital gains property, the limit is 30% of AGI. This means your $40,000 deduction may not be fully usable in the year of the sale if your AGI is modest.

Fortunately, unused charitable deductions can be carried forward for five years. If you cannot use the full deduction in year one, you can use it in later years when your income is higher or you make additional charitable gifts.

Appraisal requirements and substantiation

For any bargain sale of property valued above $5,000, you must obtain a qualified appraisal. A qualified appraiser (meeting IRS standards) must value the property as of the transaction date. The appraisal is required for both the donor and the charity to establish fair-market value and allocate basis correctly. The donor includes a summary of the appraisal with their tax return.

The charity must also acknowledge the property transferred and its fair-market value. The donor should request a written statement from the charity confirming the sale price and the property received. This documentation protects both parties if the IRS later questions the valuation or the allocation of basis.

Restricted property and real-estate complications

Bargain sales of real estate can trigger complications if the property is encumbered by debt, subject to easements, or has environmental liabilities. A bargain sale of mortgaged real estate, for instance, can create unintended income recognition if the mortgage exceeds the adjusted cost basis — a technical rule to watch.

Restricted stock or donated securities must be valued at fair-market value as of the sale date. If the securities are subject to trading restrictions, the valuation discount can be substantial, reducing both the taxable gain and the charitable deduction.

Who benefits most from a bargain sale?

The strategy is most attractive to donors in high marginal tax brackets with large unrealised gains in appreciated property, particularly when they have charitable intentions but also need cash. Retirees with concentrated stock positions, family business owners with appreciated real estate, and founders holding restricted equity sometimes use bargain sales to accomplish both goals simultaneously.

Institutional investors (such as endowments or DAFs) that have accumulated appreciated securities can also benefit from bargain sales, though the transaction must be carefully planned to avoid unrelated business income tax implications.

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