9069 / How is the charitable contribution deduction computed when property is sold to a charity at a reduced price (in a “bargain sale”)?

If property is sold to a charity for less than its fair market value (a bargain sale), the individual must first determine whether a charitable deduction is allowable under the general rules governing charitable deductions (see Q 9059). The taxpayer must then determine the amounts of the allowable deduction and gain (if any) that will result from the transaction. The taxpayer first calculates the percentage of the property’s fair market value that is being contributed and what percentage is being sold. (The fair market value of the contributed portion is the fair market value of the entire property less the amount realized on the sale.¹ The fair market value of the portion sold is the amount realized on the sale.)

To determine the permissibility and the amount of the deduction for the contributed portion, the value of the contributed portion must be reduced by any gain that would not have been realized as long-term capital gain had the contributed portion been sold, taking into account the basis allocated to it.² If the sale of the contributed portion by the donor would have resulted in long-term capital gain (see example 2, below), no reduction is required unless the gift is tangible personal property and the use of the gift will be unrelated to the function of the charity.³

After any such reduction required by IRC Section 170(e)(1) has been made, the remaining amount of the contribution is the allowable deduction.

The taxpayer’s adjusted basis in the property is then allocated to each portion in these proportions.⁴ It is allocated between the portions contributed and sold, based on their relative proportions of the property’s fair market value.⁵ Gain is recognized on the sale portion to the extent the amount realized exceeds the allocated basis. However, no loss is recognized if the sale amount is less than the allocated basis of the sold portion.⁶ The amount of the deduction for the contributed portion is determined as if property having the allocated basis and allocated fair market value were given.