14.8 Bargain Sales of Appreciated Property

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:

Step 1. Divide the sales proceeds by the fair market value of the property. If the property is mortgaged, include the outstanding debt as sale proceeds.
Step 2. Apply the Step 1 percentage to the adjusted basis of the property. This is the portion of basis allocated to the sale.
Step 3. Deduct the resulting basis of Step 2 from the sales proceeds to find the gain.

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.

EXAMPLES
1. Lana Briggs sells to a university for $12,000 stock she held over a year. The adjusted basis of the stock is $12,000, and the fair market value is $20,000. On the sale, she recouped her investment and donated the appreciation of $8,000, but, at the same time, she realized taxable gain of $4,800 computed as follows: The percentage of basis applied to the sale is 60% ($12,000 sale proceeds ÷ $20,000 fair market value). Thus, 60% of the $12,000 basis, or $7,200, is allocated to the sale. Gain on the sale equals the $12,000 sale proceeds less the $7,200 allocated basis, or $4,800.
2. Joel Marx sells to his church stock held short term for his basis of $4,000. The stock is worth $10,000. Using the allocation method in Example 1, 40% ($4,000 sale proceeds ÷ $10,000 fair market value) of his $4,000 basis, or $1,600, is allocated to the sale. Thus, he has a short-term capital gain of $2,400 ($4,000 sale proceeds − $1,600 allocated basis). Furthermore, his deductible charitable contribution is also $2,400, equal to the 60% of basis allocated to the gift (60% of $4,000 = $2,400).

Basis allocation applies even if a deduction is barred by the annual ceiling.

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.

EXAMPLE
The Hodgdons contributed real estate valued at $3.9 million but subject to mortgage debt of $2.6 million. The IRS treated the mortgage debt as sales proceeds and figured gain based on the difference between the debt and the portion of basis allocated to the sale element. The Hodgdons claimed that the basis allocation rule, which increased the amount of their gain, should not apply. Earlier in the year, they had made another donation that used up their charitable deduction ceiling for that year as well as for the following five-year carryover period. The Tax Court held that the basis allocation rule applied because a charitable deduction was “allowable,” even if the contribution did not actually result in a deduction in the carryover period.
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3.148.145.2