What is a Bargain Sale?
Under the Internal Revenue Code (IRC), a bargain sale is a transaction that allows a property owner to make a part sale and part gift of their property to a nonprofit entity or charitable organization and receive a charitable income tax deduction. It allows the seller/donor to make a gift that benefits the community, and in many cases, the tax deduction to the seller/donor is much more beneficial than a traditional sale.
The amount of the tax deduction is the difference between the cash received and the fair market value as determined by a “Qualified Appraisal.” The Bargain Sale strategy is often used by large businesses in commercial transactions, but it can also be used by individuals.
Do You Meet the Requirements for an IRC 170 Transaction?
- The seller must have sufficient taxable income. This may be in the form of annual income, proceeds from the sale of a business or other property, even an inheritance.
- Buyer must be a Federally recognized nonprofit entity (i.e.: 501(c)(3))
- A “Qualified Appraisal” must be done by a certified appraiser.
How To Determine the Value of Your Property
IRS guidelines state “The fair market value is the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having reasonable knowledge or relevant facts.”
In many real estate transactions, the seller has an immediate need to dispose of the property which causes the sale price to be lower. This is commonly known as a “distressed sale.” With a bargain sale, the value of the property for purposes of determining the amount of the tax deduction is the actual fair market value. For more information on how property value is determined in a bargain sale, see IRS Publication 561.
If you have substantial income and subsequent income tax liabilities or expect to have significant taxable income in the future, the after-tax cash benefit received of a bargain sale to a qualified nonprofit entity could be very advantageous. It’s also worth noting, once the property is transferred, the seller is no longer liable for property taxes, maintenance, or other responsibilities for the real property.
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