In tax terms, a bargain sale is a sale to a charity for less than the fair market value (FMV) of the item being sold. These sales can be a real win-win: the charity acquires something it needs, but otherwise couldn't afford, and the donor/seller obtains cash and a tax deduction for the difference between the sales price and the FMV. Perhaps a hospital acquires a nearby parking garage, a church acquires a home for its minister or a land trust acquires a conservation easement. Although less common, museums also purchase art or historical memorabilia for their collections on “bargain” terms.

What about financial assets, such as closely held or publicly traded stock? These are frequently the subjects of bargain sales, but the form of the transaction is typically a charitable gift annuity.1 The present value of the annuity is treated as the sales price, with the gain reported over the donor's life.2 A charity is unlikely to want to retain a financial asset, especially a closely held one, so the charity will want to sell the asset shortly after the transaction. In the case of closely held stock, either the corporation itself will redeem the stock, or a related party may step up and purchase it.

If the charity isn't going to retain the asset, either as an investment or to use in its exempt function, the charity may want some assurance that it will be able to convert the asset into cash relatively soon after the purchase. On the other hand, the donor wants to avoid the assignment of income rules that would trigger taxable income to him on the portion of the asset he's donating. To avoid assignment of income, there should be no binding commitment to sell the asset at the time of the donation; however, preliminary discussions are permissible.3

Any transaction that's both a sale and a donation is likely to have some tax complexity. For example, a donor who paid $400,000 for land that's worth $1 million today may contemplate selling that land to a charity for his original cost, thinking he would have no gain or loss on the sale. Unfortunately, the rules don't work that way. The charitable bargain sale rules allocate the cost proportionately between the sale portion (40 percent) and the donated portion (60 percent).4 So, his $400,000 cost is allocated only 40 percent against his $400,000 sale, leaving him a taxable gain of $240,000. As long as the donor understands this before the transaction, that's fine; it's when he finds out about the gain the following April 15, that he's likely to be upset. It's easy to be confused by this basis allocation rule, because a bargain sale to a non-charity would allow the seller to recover his basis first. If he had sold the same land to his sister for $400,000, he would indeed have had no gain or loss, but he also would have made a taxable gift of $600,000.5

What other tax complications can arise? If the bargain sale produces a loss, the loss isn't deductible.6 The seller should consider selling the asset to an unrelated third party, taking the loss and then donating the cash to the charity. Of course, that only applies to business or investment assets; losses on the sale of personal use assets aren't deductible. If the property has been subject to depreciation deductions, the donation deduction will be reduced by the amount of gain that would have been ordinary income if the property had been sold on the date of the donation.7 This reduction can affect bargain sales (or any donations) of business or investment property. If the seller/donor is a corporation, and the asset is depreciated real estate, Internal Revenue Code Section 291 may further reduce the deduction by increasing the portion of the depreciation considered to be ordinary income.8

As with any donations of property other than cash or marketable securities, a qualified appraisal is required to support the bargain portion of the bargain sale,9 and a donation acknowledgement is also required.10

Assuming the tax issues are properly addressed, and both parties are satisfied with the price, a bargain sale can be a versatile tool in the charitable planning toolkit.

— This publication contains general information only and Deloitte is not, by means of this publication, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This publication is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional advisor. Deloitte, its affiliates and related entities, shall not be responsible for any loss sustained by any person who relies on this publication.


  1. Treasury Regulations Section 1.1011-2.
  2. Treas. Regs. Section 1.1011-2(c) Example (8).
  3. Revenue Ruling 78-197.
  4. Supra note 1.
  5. Treas. Regs. Section 1.1001-1(e)(2) Ex. (1).
  6. Treas. Regs. Section 1.1001-1(e)(1).
  7. Internal Revenue Code Section 170(e)(1)(A).
  8. IRC Sections 291, 1245 and 1250.
  9. Treas. Regs. Section 1.170A-13.
  10. Treas. Regs. Section 1.170A-13(f)(2).