Bargain Sale Charitable Gifts

1. Several years ago I purchased land for $200,000 in cash. It has since gone up in value to $1,000,000. The property is next to the campus of a small college (a public charity), and the college would like to have the land. I sell the land to the college for $500,000. What is my charitable deduction?

The charitable deduction for a bargain sale is value of the item given less the value of any items received in return from the charity. In this case the land had a current value of $1,000,000 and the charity paid $500,000. Thus, $1,000,000 - $500,000 = $500,000

Explanation

The charitable deduction for a bargain sale is value of the item given less the value of any items received in return from the charity. In this case the land had a current value of $1,000,000 and the charity paid $500,000. Thus, $1,000,000 - $500,000 = $500,000

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2. A bargain sale is

The sale of an asset to a charity at less than fair market value

When a percentage of the gross proceeds from the sale of an item are dedicated, in advance, to go to a charity

When a percentage of the net proceeds from the sale of an item are dedicated, in advance to go to a charity

When a donor finds an item needed by a charity available for sale at a discounted price, purchases the item, then gives the item to the charity

When the charity sells an asset to a donor at less than fair market value

A bargain sale is when the donor sells an asset to a charity for less than its fair market value, thus constituting a part sale and part gift. A charity may not sell an asset to a donor at less than fair market value as this could be considered a violation of the rule against private inurement.

Explanation

A bargain sale is when the donor sells an asset to a charity for less than its fair market value, thus constituting a part sale and part gift. A charity may not sell an asset to a donor at less than fair market value as this could be considered a violation of the rule against private inurement.

3. Which of the following transactions would result in a potential charitable deduction of $600,000?

The donor gives land worth $1,000,000 to a charity in exchange for $400,000

The donor gives a $1,200,000 house to a charity with a mortgage of $600,000

The donor gives $900,000 in stock to a charity in exchange for a lifetime income with a present value of $300,000

The donor makes a gift of appreciated artwork to a charity for display in the charity’s art gallery that has a fair market value of $600,000

All of the above

All of the options would generate a potential charitable deduction of $600,000.

Explanation

All of the options would generate a potential charitable deduction of $600,000.

4. Several years ago I purchased land for $200,000 in cash. It has since gone up in value to $1,000,000. The property is next to the campus of a small college (a public charity), and the college would like to have the land. I sell the land to the college for $500,000. What is the capital gain resulting from this transaction?

$200,000

$400,000

$500,000

$800,000

$1,000,000

The capital gain is the price paid, $500,000 less the portion of the basis attributable to the sale part of the transaction. The percentage of the basis attributable to the sale part of the transaction is equal to the ratio of the money received ($500,000) to the value of the property ($1,000,000) or 50%. (You can also think of this as the percentage of the property value sold.) Thus 50% of the basis (or $100,000 of the original $200,000 basis) may be applied to the sale portion of the transaction. This means the gain is the money received, $500,000, less the basis allocated to the sale, $100,000, for a difference of $400,000.

Explanation

The capital gain is the price paid, $500,000 less the portion of the basis attributable to the sale part of the transaction. The percentage of the basis attributable to the sale part of the transaction is equal to the ratio of the money received ($500,000) to the value of the property ($1,000,000) or 50%. (You can also think of this as the percentage of the property value sold.) Thus 50% of the basis (or $100,000 of the original $200,000 basis) may be applied to the sale portion of the transaction. This means the gain is the money received, $500,000, less the basis allocated to the sale, $100,000, for a difference of $400,000.

5. Grace would like to donate some land to a public charity which will use it to provide hippotherapy opportunities for people with disabilities. She acquired the land twenty years ago for $50,000, and it is now worth $200,000. Grace wants to receive or retain $20,000 from the transaction. She is debating whether she should sell the property and give the proceeds above $20,000 (“sell and gift”), or simply give the land to the charity and have the charity pay her $20,000 (“bargain sale”). Grace would get the most tax advantages from

“Sell and gift” because of the difference in charitable tax deduction

“Sell and gift” because of the difference in capital gains taxes

“Bargain sale” because of the difference in charitable tax deduction

“Bargain sale” because of the difference in capital gains taxes

Both transactions are equally advantageous.

The adjusted basis allocated to the sale portion of the bargain sale is $5,000 (The $20,000 price is 10% of the $200,000 value. 10% of $50,000 basis is $5,000). In the bargain sale, she will recognize a gain of $15,000 ($20,000 - $5,000). In the “sell and gift” transaction her gain is the $200,000 value less the $50,000 basis or $150,000. Thus, the capital gain is much larger in the “sell and gift” making the “bargain sale” the more tax advantaged transaction. In either the “sell and gift” or “bargain sale” transactions the charitable deduction s $180,000 ($200,000 - $20,000),

Explanation

The adjusted basis allocated to the sale portion of the bargain sale is $5,000 (The $20,000 price is 10% of the $200,000 value. 10% of $50,000 basis is $5,000). In the bargain sale, she will recognize a gain of $15,000 ($20,000 - $5,000). In the “sell and gift” transaction her gain is the $200,000 value less the $50,000 basis or $150,000. Thus, the capital gain is much larger in the “sell and gift” making the “bargain sale” the more tax advantaged transaction. In either the “sell and gift” or “bargain sale” transactions the charitable deduction s $180,000 ($200,000 - $20,000),

6. I have a piece of property worth $600,000 with a basis of $100,000. I would like $300,000 of the value to go to charity and I would like to keep $300,000 of the value. Ignoring non-tax related transaction costs, what is the difference in the net amount received by the charity if I sell this property for $600,000 and give $300,000 in cash to the charity (“sale then gift”) as compared to selling the property to the charity for $300,000 (“bargain sale”), allowing the charity to then sell the property for $600,000?

The amount retained by the charity is less in the “bargain sale” because the charity must pay capital gains tax upon the sale of the property

The amount retained by the charity is less in the “sale then gift” because the charity must pay capital gains tax upon the sale of the property

The amount retained by the charity is less in the “bargain sale” because the donor must pay more capital gains tax

The amount retained by the charity is less in the “sale then gift” because the donor must pay more capital gains tax

The amount retained by the charity is the same in both transactions

In both cases the charity retains $300,000 (ignoring non-tax related transaction costs). Charities do not pay capital gains tax when selling property, and the capital gains tax paid by the donor is irrelevant to the amount that the charity keeps in the transactions described.

Explanation

In both cases the charity retains $300,000 (ignoring non-tax related transaction costs). Charities do not pay capital gains tax when selling property, and the capital gains tax paid by the donor is irrelevant to the amount that the charity keeps in the transactions described.

7. I have a piece of property worth $600,000 with a basis of $100,000. I would like $300,000 of the value to go to charity and I would like to keep $300,000 of the value. What is the difference in the capital gain if I sell this property for $600,000 and give $300,000 in cash to the charity (“sale then gift”) as compared to selling the property to the charity for $300,000 (“bargain sale”), allowing the charity to then sell the property for $600,000?

The capital gain is the same

The capital gain from the “sale then gift” is $500,000, and the capital gain from the “bargain sale” is $200,000

The capital gain from the “sale then gift” is $500,000, and the capital gain from the “bargain sale” is $250,000

The capital gain from the “bargain sale” is $500,000, and the capital gain from the “sale then gift” is $250,000

The capital gain from the “bargain sale” is $500,000, and the capital gain from the “sale then gift” is $200,000

The capital gain from the selling then gifting is the $600,000 price less the $100,000 basis or $500,000. The capital gain from a bargain sale is the $300,000 price less the part of the basis allocable to the sale part of the transaction. The percentage of the basis allocated to the sale part of a bargain transaction is equal to percentage of the property value received or, in this case $300,000 / $600,000, or 50%. Thus 50% of the original $100,000 in basis can be used to offset the $300,000 price in the bargain sale. Thus the gain from the bargain sale is the $300,000 price less $50,000 of the original basis, for a total gain of $250,000.

Explanation

The capital gain from the selling then gifting is the $600,000 price less the $100,000 basis or $500,000. The capital gain from a bargain sale is the $300,000 price less the part of the basis allocable to the sale part of the transaction. The percentage of the basis allocated to the sale part of a bargain transaction is equal to percentage of the property value received or, in this case $300,000 / $600,000, or 50%. Thus 50% of the original $100,000 in basis can be used to offset the $300,000 price in the bargain sale. Thus the gain from the bargain sale is the $300,000 price less $50,000 of the original basis, for a total gain of $250,000.

8. Several years ago I purchased land for $200,000 in cash. It has since gone up in value to $1,000,000. The property is next to the campus of a small college (a public charity), and the college would like to have the land. I sell the land to the college for $500,000. How much of the original cost basis is attributable to the sale portion of the transaction for purposes of calculating the capital gain?

$100,000 (50%)

$200,000 (100%)

$500,000 (50%)

$1,000,000 (100%)

$0 (0%)

The percentage of the property value sold is equal to the percentage of the cost basis allocated to the sale. In this case, 50% of the value of the property was sold ($500,000 price / $1,000,000 value). Consequently, 50% of the cost basis is allocated to the sale. The cost basis was the price paid of $200,000. (If the property had been depreciated or if it had capital improvements added to it the basis would have changed and would be referred to as the adjusted basis; however, the same percentage of the adjusted basis would be applied to sale portion of the transaction.)

Explanation

The percentage of the property value sold is equal to the percentage of the cost basis allocated to the sale. In this case, 50% of the value of the property was sold ($500,000 price / $1,000,000 value). Consequently, 50% of the cost basis is allocated to the sale. The cost basis was the price paid of $200,000. (If the property had been depreciated or if it had capital improvements added to it the basis would have changed and would be referred to as the adjusted basis; however, the same percentage of the adjusted basis would be applied to sale portion of the transaction.)

9. I purchased stock several years ago for $500,000. Today it is worth $400,000. I give the shares to a charity for $200,000. What is my capital loss on the transaction?

$0

$50,000

$100,000

$200,000

$300,000

Bargain sale transactions cannot generate capital losses for tax purposes.

Explanation

Bargain sale transactions cannot generate capital losses for tax purposes.

10. What is the capital gain on a transaction where I sell a piece of property, with a basis of $200,000, for its fair market value of $1,000,000 and then give $500,000 from that sale to a charity?

$300,000

$400,000

$500,000

$800,000

$900,000

The fact that part of the money from the sale of the property is given to charity is irrelevant for calculating capital gain. Consequently, this is simply the sale of a $1,000,000 item of property with a basis of $200,000. The capital gain is the fair market value price received ($1,000,000) less the basis ($200,000), or $800,000

Explanation

The fact that part of the money from the sale of the property is given to charity is irrelevant for calculating capital gain. Consequently, this is simply the sale of a $1,000,000 item of property with a basis of $200,000. The capital gain is the fair market value price received ($1,000,000) less the basis ($200,000), or $800,000

11. What is the capital gain on a transaction where I sell a piece of property, with a basis of $200,000, to a charity for $500,000 and the charity then immediately sells the property for its fair market value of $1,000,000?

$300,000

$400,000

$500,000

$800,000

$900,000

I received $500,000 in the transaction. From this I subtract a portion of the basis. I can allocate the percentage of the cost basis to the sale part of this transaction that is equal the percentage of the property value sold. In other words, I received $500,000 for a $1,000,000 value property, so I can use 50% ($500,000/$1,000,000) of the property’s basis. The basis is $200,000, so I can use 50%, or $100,000 of that basis. The $500,000 I received less the $100,000 of basis I can use is $400,000.

Explanation

I received $500,000 in the transaction. From this I subtract a portion of the basis. I can allocate the percentage of the cost basis to the sale part of this transaction that is equal the percentage of the property value sold. In other words, I received $500,000 for a $1,000,000 value property, so I can use 50% ($500,000/$1,000,000) of the property’s basis. The basis is $200,000, so I can use 50%, or $100,000 of that basis. The $500,000 I received less the $100,000 of basis I can use is $400,000.

12. Mary has two lots, each worth $500,000. She plans to give one lot to charity and sell the other lot for her personal use. She originally purchased lot A for $100,000 and lot B for $400,000. Which transaction would give her the largest potential tax benefit?

The tax consequences are the same regardless of which lot is given to charity.

Giving lot A and selling lot B maximizes the tax benefits because of differences in both capital gain and the charitable deduction.

Giving lot A and selling lot B maximizes the tax benefits because of differences in capital gain, even though the though the charitable deduction is the same regardless of which lot is given.

Giving lot B and selling lot A maximizes the tax benefits because of differences in both capital gain and the charitable deduction.

Giving lot B and selling lot A maximizes the tax benefits because of differences in capital gain, even though the though the charitable deduction is the same regardless of which lot is given.

Because lot A is more highly appreciated (lower basis), selling it will result in a larger capital gain. Thus, the more beneficial transaction is to give lot A and sell lot B. There are no differences in the income tax charitable deduction regardless of which lot is sold.

Explanation

Because lot A is more highly appreciated (lower basis), selling it will result in a larger capital gain. Thus, the more beneficial transaction is to give lot A and sell lot B. There are no differences in the income tax charitable deduction regardless of which lot is sold.

13. What is the general rule for how much of a charitable deduction a donor can claim as the result of a bargain sale?

The donor may deduct the fair market value of the item given

The donor may deduct the proceeds from the sale less the share of basis attributable to the sale portion of the transaction

The donor may deduct only the cost basis of the item given

Subtract the value of what you receive from the value of what you give; that amount is a potentially deductible charitable gift

The donor may deduct up to 30% of his or her adjusted gross income

The general idea of a bargain sale is that the donor may deduct the value of what he or she gives less the value of what he or she receives. Whether fair market value or basis is used, or what income limits apply, is not dependent upon the existence of a bargain sale. Finally, the proceeds from the sale less the share of basis attributable to the sale portion of the transaction is the capital gain from the sale.

Explanation

The general idea of a bargain sale is that the donor may deduct the value of what he or she gives less the value of what he or she receives. Whether fair market value or basis is used, or what income limits apply, is not dependent upon the existence of a bargain sale. Finally, the proceeds from the sale less the share of basis attributable to the sale portion of the transaction is the capital gain from the sale.

14. A donor owns three lots, each worth $100,000, each with a $10,000 cost basis and each with $50,000 of debt. The donor works with a lender to shift the debt such that two lots each have $75,000 of debt and the third lot has no debt. What is the capital gain if the donor gives this one lot with no debt to a charity?

$0

$20,000

$80,000

$90,000

$100,000

This transaction is not a bargain sale as the donor received no relief of debt or other consideration from the charity. As a simple gift of appreciated property, there is no capital gain.

Explanation

This transaction is not a bargain sale as the donor received no relief of debt or other consideration from the charity. As a simple gift of appreciated property, there is no capital gain.

15. Several years ago I purchased a quad-plex apartment building for $200,000 in cash. It has since gone up in value to $1,000,000. I have claimed depreciation deductions on the property of $50,000 and have make capital improvements to the property of $250,000. The property is next to the campus of a small college (a public charity), and the college would like to have the building. I sell the building to the college for $500,000. What is the capital gain resulting from this transaction?

$200,000

$300,000

$400,000

$500,000

$600,000

The capital gain is the price paid, $500,000 less the portion of the basis attributable to the sale part of the transaction. The percentage of the basis attributable to the sale part of the transaction is equal to the ratio of the money received ($500,000) to the value of the property ($1,000,000) or 50%. (You can also think of this as the percentage of the property value sold.) Thus 50% of the basis may be applied to the sale portion of the transaction. The original cost basis was $200,000. This original basis has been reduced by $50,000 of depreciation deductions, but it has also been increased by $150,000 of capital improvements, so the adjusted basis is now $400,000. This means the gain is the money received, $500,000, less the basis allocated to the sale, $200,000, for a difference of $300,000.

Explanation

The capital gain is the price paid, $500,000 less the portion of the basis attributable to the sale part of the transaction. The percentage of the basis attributable to the sale part of the transaction is equal to the ratio of the money received ($500,000) to the value of the property ($1,000,000) or 50%. (You can also think of this as the percentage of the property value sold.) Thus 50% of the basis may be applied to the sale portion of the transaction. The original cost basis was $200,000. This original basis has been reduced by $50,000 of depreciation deductions, but it has also been increased by $150,000 of capital improvements, so the adjusted basis is now $400,000. This means the gain is the money received, $500,000, less the basis allocated to the sale, $200,000, for a difference of $300,000.

16. Madolyn would like to donate some land to a public charity that builds parks in downtown areas. She acquired the land ten years ago for $100,000, and it is now worth $200,000. She still has an outstanding mortgage balance of $40,000 on the property. If she transfers the property to the charity subject to the mortgage, how much will she have to pay in capital gains taxes? (Assume the capital gains tax rate is 15%.)

$3,000

$6,000

$15,000

$30,000

$40,000

If she gifts the property subject to a $40,000 mortgage, she is deemed to have received $40,000. She can offset this with the percentage of the basis allocated to the sale part of a bargain transaction. The percentage of the $100,000 basis allocated to the sale part of a bargain transaction is equal to percentage of the property value received or, in this case $40,000 / $200,000, i.e., 20%. Thus the capital gain is $40,000 - $20,000 (20% of the $100,000 basis) which is a difference of $20,000. Her capital gains taxes are $20,000 * 15% = $3,000.

Explanation

If she gifts the property subject to a $40,000 mortgage, she is deemed to have received $40,000. She can offset this with the percentage of the basis allocated to the sale part of a bargain transaction. The percentage of the $100,000 basis allocated to the sale part of a bargain transaction is equal to percentage of the property value received or, in this case $40,000 / $200,000, i.e., 20%. Thus the capital gain is $40,000 - $20,000 (20% of the $100,000 basis) which is a difference of $20,000. Her capital gains taxes are $20,000 * 15% = $3,000.

17. A donor owns three lots, each worth $100,000, each with a $10,000 cost basis and each with $50,000 of debt. What is the capital gain if the donor gives two of these lots to a charity along with the mortgage debt?

$0

$20,000

$80,000

$90,000

$100,000

If the charity receives property with debt, it is considered to be a bargain sale. The amount of debt taken over by the charity is considered to be an amount received by the donor. Thus, in this case the charity is taking on $100,000 of debt. The donor’s capital gain is the $100,000 less the share of the original basis that can be allocated to the sale portion of the transaction. The percentage of the basis allocated to the sale part of a bargain transaction is equal to percentage of the property value received or, in this case $100,000 / $200,000, or 50%. Thus 50% of the original $20,000 in basis (or $10,000) can be used to offset the $100,000 price in the bargain sale. Thus, the donor’s capital gain is $90,000 ($100,000 relief of debt les $10,000 of basis).

Explanation

If the charity receives property with debt, it is considered to be a bargain sale. The amount of debt taken over by the charity is considered to be an amount received by the donor. Thus, in this case the charity is taking on $100,000 of debt. The donor’s capital gain is the $100,000 less the share of the original basis that can be allocated to the sale portion of the transaction. The percentage of the basis allocated to the sale part of a bargain transaction is equal to percentage of the property value received or, in this case $100,000 / $200,000, or 50%. Thus 50% of the original $20,000 in basis (or $10,000) can be used to offset the $100,000 price in the bargain sale. Thus, the donor’s capital gain is $90,000 ($100,000 relief of debt les $10,000 of basis).