The Bargain Sale
The Bargain Sale
A Bargain Sale is a transaction created by the IRS in 1917 to promote philanthropy, comprising a cash sale for a portion of a property’s Fair Market Value and a charitable donation for the difference. In a Bargain Sale, the property owner is both a seller (for the cash portion) and a donor (for the donated portion).
A Bargain Sale contains three components:
- a Qualified Appraisal to establish the property’s Fair Market Value;
- a Partial Cash payment for less than the FMV;
- and a Charitable Donation for the difference.
The Partial Cash Payment is negotiated and often used to pay-off debt, other obligations of the property, or to provide the seller with personal funds. The Seller pays capital gain taxes on the partial cash payment only, on a prorated basis, based on the percentage of the cash payment to the Fair Market Value.
The Charitable Donation is eligible for a tax deduction against the donor’s Adjusted Gross Income for the year of the contribution and, if necessary, for five additional years. In a Bargain Sale involving real estate, the tax deduction may be applied against a maximum of 30% of the donor’s AGI in each of the six years or until the deduction is completely used, whichever comes first. The donor avoids all capital gain obligations on the charitable contribution portion.
When the Partial Cash Payment to the Donor and the Cash Value of the Donor’s Tax Deduction are added to the Net Funds granted to the recommended nonprofits, the total value of after-tax cash benefits shared between the donor and nonprofit(s) often exceeds the property’s actual Sale Value.
We call this “Charitable Leverage”.
RGF is actively seeking Outright Gifts of real estate, has the strategic funds to make negotiated Partial Cash Payments under Bargain Sale arrangements, and is actively seeking real estate gifts from individuals and corporations.
|Example:||Fair Market Value||$2,500,000||Appraised Value|
|Partial Cash Payment||1,000,000|
|Charitable Donation||1,500,000||Value of Tax Deduction|