Sell Property to Charity and Get a Tax Deduction
You Can Sell Property to Charity and Get a Tax Deduction
“Bargain Sale” of Property
You or your client may be able to claim a tax deduction for a charitable donation the charity pays you to make. How? By selling your property to charity at a bargain price. This is a “bargain sale.”
Both you and the charity can benefit from a bargain sale. The charity acquires property it wants at a good price. And you not only get cash, but also a sizable tax deduction (depending on how big a bargain you give the charity).
How Does It Work?
The bargain sale is treated as two transactions: (1) a sale, and (2) a charitable gift. The deduction for the charitable gift can more than offset any gain on the sales part.
Idea in action: You bought a painting for $2,000 six years ago. It’s now worth $10,000 and your local museum wants it–but you want to recover the $2,000 you paid for it. The museum agrees to buy the painting for the $2,000 bargain price.
On the sales part of the transaction, you have to figure your gain for tax purposes. To do this you need your tax cost. In this case, your tax cost is the portion of your original cost that’s in the same ratio as the sales price is to the current value of the property. That ratio is one-fifth ($2,000 sale price divided by the $10,000 current value). One-fifth, or 20 percent, of your original cost is $400 (20 percent of $2,000). Your tax cost is $400, so your gain is $1,600 ($2,000 – $400).
For the charitable gift portion, you get an $8,000 deduction ($10,000 gift less the $2,000 sales proceeds). This offsets the $1,600 gain for a net deduction of $6,400.
End result: You’ve helped out your local museum and received a $6,400 tax deduction–plus $2,000 in cash.
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