September 25, 2013
If one of your potential donors owns an asset that would be helpful to your organization, you might consider a bargain sale: purchasing the item from the donor, but not at full price.
For instance, suppose the donor owns a valuable piece of artwork that a museum would like to acquire. Although the individual would like to sell the painting to raise cash, the person is also sympathetic to the museum’s mission. So, the donor sells the painting to the museum for less than its full appraised value at a bargain price.
When property is transferred to a charity in return for consideration totaling less than the property’s fair market value, the transaction is divided:
- To the extent that payment is received, the transaction is treated as a sale and results in a gain or loss to the owner.
- To the extent that the fair market value of the property exceeds the payment, the transaction is treated as a gift, resulting in a charitable deduction.
Consider this situation. A potential donor acquired some vacant land years ago for $20,000. Recently, a developer offered $100,000 for it. The owner’s town would like to acquire the land to preserve open space but cannot afford to pay full value. If the owner sells the land to the town for, say $80,000, two transactions have been made:
1. A sale of 80 percent ($80,000/$100,000) of the property, resulting in a gain for the owner of $64,000 ($80,000 selling price less $16,000, which is 80 percent of the basis)
2. A gift of 20 percent of the property, resulting in a charitable contribution deduction for the donor for $20,000 ($100,000 – $80,000)
Note that the same result could be obtained by first borrowing $80,000 against the property and then giving the property to the town, with the town assuming the obligation to repay the loan. This transaction may be advisable when the recipient is agreeable but does not have the cash you require.
This article was originally posted on September 25, 2013 and the information may no longer be current. For questions, please contact GRF CPAs & Advisors at email@example.com.