A sale of appreciated property to a philanthropy for less than fair market value allows you to claim a charitable deduction while receiving proceeds from the sale. However, you must pay a tax on part of the gain attributed to the sale. That is, the transaction is broken down into two parts: the sale and the gift.
To compute gain on the sale, you allocate the adjusted basis of the property between the sale and the gift following these steps:
You may deduct the donated appreciation if full market value would be deductible on a straight donation (no sale) under the rules in 14.6. Thus, the donated appreciation is deductible if the property is securities or real estate held long term or long-term tangible personal property related to the charity’s exempt function; see Example 1 below. However, if a deduction for the property (assuming no sale) would be reduced to cost basis as discussed in 14.6, your charitable deduction on the sale is also reduced; see Example 2 below. This reduction affects sales of capital gain property held short term; ordinary income property; tangible personal property not related to the charity’s exempt function; depreciable personal property subject to recapture; and sales of capital gain property to private non-operating foundations.
The basis allocation rules for determining gain on a bargain sale apply even if the annual deduction ceilings (14.17) bar a deduction in the year of the donation and in the five-year carryover period.
3.14.251.128