Bargain Sale to Charity Analysis: How It Works, Who It Fits, and the Catch

How a bargain sale works

A bargain sale is one transaction treated as two. You sell property to a qualified charity for less than its fair market value. The price you receive is a sale. The value you give up is a charitable contribution.

The twist is in the basis. Under IRC 1011(b), if a charitable deduction is allowable because of the sale, your basis for figuring gain is only the portion of your total basis that the amount realized bears to the property's fair market value. In plain English: if the charity pays 40 percent of value, only 40 percent of your basis offsets the sale price. The other 60 percent of basis goes with the gift.

Two details catch people:

• Debt counts as price. If the charity takes the property subject to a mortgage, the debt relief is part of the amount realized, so even a "pure" gift of mortgaged property is a bargain sale (Treas. Reg. 1.1011-2(a)(3)).
• Ordinary income property shrinks the deduction. IRC 170(e)(1)(A) reduces the deduction by any gain that would not have been long-term capital gain, such as Section 1245 depreciation recapture on equipment or inventory.

Who it fits, and who it does not

Good fit:

• Owners of land or buildings a charity actually wants (a land trust, a university next door, a church expanding) who are happy for the charity to have it at a discount.
• Sellers with a low basis who would like to pull out some cash without recognizing the whole gain.
• Itemizers with enough income to use a large deduction within the five-year carryforward window.

Poor fit:

• Anyone trying to maximize cash. A full-price sale always puts more money in your pocket; the bargain sale is a way to give, not a way to net more.
• Property the charity cannot use or sell easily. Many charities have no budget to buy, and some will not accept environmental, debt or management headaches.
• Non-itemizers or people with little income left after the sale year to absorb the deduction.

Worked example (engine-computed federal tax)

Assumptions, labeled: married filing jointly, 2026 federal rates (Rev. Proc. 2025-32), $300,000 of other ordinary income, standard deduction for the tax math, Texas residents (no state income tax). Raw land held 20 years, fair market value $1,000,000, basis $200,000, no depreciation and no debt. Federal tax below is the extra tax caused by the sale, from our tax engine, including the 3.8 percent net investment income tax. The value of the charitable deduction is left out of the tax lines because it depends on the rest of the return.

How to read it: the bargain sale cuts the gain by $480,000 and the federal tax on the sale by $118,025, and creates a $600,000 contribution. But the seller walks away with less cash than a full-price sale even after the deduction, because $600,000 of value went to the charity. That is the honest frame: a bargain sale is the most tax-efficient way to make a large gift of an asset while still taking some cash out, not a way to net more money.

The deduction is then limited. Gifts of long-term capital gain property to a public charity are capped at 30 percent of the contribution base each year (IRC 170(b)(1)(C)), with a five-year carryforward. In 2026, only contributions above 0.5 percent of the contribution base count (IRC 170(b)(1)(I)), and taxpayers in the 37 percent bracket lose part of the benefit under IRC 68, which caps it near 35 percent. Run your own one-year vs spread numbers in the estimator.

The alternative: gift an undivided share, then sell

When the charity does not want to own the property long term, owners sometimes give the charity an undivided fractional interest (say, a quarter of the land as tenants in common) and then both co-owners sell to an outside buyer. A gift of an undivided portion of your entire interest is an allowed partial-interest gift under IRC 170(f)(3)(B)(ii). You are taxed only on the share you still own when the sale closes, and you deduct the value of the share you gave.

Timing is everything. If the gift is made after the sale is practically certain, the IRS can tax you on the charity's share of the proceeds under the anticipatory assignment of income doctrine. Palmer v. Commissioner, 62 T.C. 684 (1974), and Rev. Rul. 78-197 respect a gift when the charity is not legally bound to sell; Hoensheid v. Commissioner, T.C. Memo. 2023-34, taxed the donor where the sale was effectively done before the gift. Deed the share to the charity before a binding purchase agreement exists, and make sure the charity can say no.

IRS stance and audit risk

Bargain sales are settled law: IRC 1011(b) has applied since 1969, and Treas. Reg. 1.1011-2 walks through the math. They are not listed transactions. The audit risk is almost always about value:

• Qualified appraisal. Noncash gifts over $5,000 (other than publicly traded securities) need a qualified appraisal and Section B of Form 8283, signed by the appraiser and the charity; gifts over $500,000 require attaching the appraisal (IRC 170(f)(11)). See IRS Publication 561 on valuation.
• Acknowledgment. The charity's contemporaneous written acknowledgment must state what it paid you (IRC 170(f)(8)).
• Valuation penalties. Overstating value can trigger the 20 or 40 percent accuracy-related penalties under IRC 6662.
• Charity resale. If the charity sells the property within three years it files Form 8282, and the IRS can compare that price with your appraisal.

Bargain sales of land for conservation are legitimate when the price and appraisal hold up. They are a different animal from the syndicated conservation easement deals the IRS treats as listed transactions.

Costs and fees

• A qualified appraisal, often several thousand dollars for real estate or a business interest.
• Normal sale costs: title, escrow, environmental review, and legal review of the purchase agreement and gift acknowledgment.
• The economic cost is the discount itself: the value that goes to the charity instead of to you.

Bargain sales with installment payments

Charities do not always have the cash to close. A bargain sale can be paid over time: the charity pays part of the price at closing and the rest on a note. The sale part of the transaction can then be reported on the installment method, so the gain on that part is spread over the years you collect, like any other installment sale. Your CPA should confirm the allocation of basis between the gift part and the sale part before the return is filed.

The usual buyer-protection rules still apply when the buyer is a charity: a meaningful down payment, a first-position deed of trust or mortgage on the property, an interest rate at or above the applicable federal rate, clear default and acceleration terms, and insurance on the property naming you as loss payee.

How it compares with a Section 453 installment sale

A Section 453 installment sale keeps the whole price in your column and spreads the tax on it. A bargain sale gives part of the price away and reduces the tax on the rest. If your goal is maximum after-tax wealth for your family, the installment sale wins. If your goal is to benefit a charity with the property itself and still take some cash, the bargain sale is the efficient tool, and the two can be combined when the charity pays over time.

The $5,000 Big Sale Tax Analysis models this path side by side with a Section 453 installment sale and the other options.

Frequently asked questions