Bargain Sales

Bargain sales are sales of property, such as securities or real estate, to Peter &Paul Community Services for less than the full fair market value. A bargain sale consists of a sale portion and a gift portion. Usually, PPCS pays you an amount equal to your cost basis in the asset. This way you are able to recover your original investment. A portion of the appreciation of the asset is considered a gift to PPCS, and you receive a tax deduction for this amount. You will owe taxes only on the part of the gain attributable to the bargain sale. The gain to be recognized is determined by dividing the selling price to PPCS by the fair market value, then multiplying that result by the total gain in value.

Example: Mr. Brown owns real estate recently appraised at $100,000. He bought the land many years ago for $20,000. He offers to sell the land to Peter & Paul Community Services for $20,000. Peter & Paul Community Services agrees to this bargain sale. The results are as follows:

1. Mr. Brown receives $20,000 from Peter & Paul Community Services Inc.
2. He can take a charitable contribution deduction of $80,000 (the appreciated portion, which he is giving to PPCS).
3. He must report a $16,000 capital gain, based on the formula above ($80K x $20K/$100K = $16K)

His capital gains tax should be no more than $16,000 x 20% (the normal capital gains tax rate) = $3,200.