J.K. Lasser's Your Income Tax 2013: For Preparing Your 2012 Tax Return

14.8 Bargain Sales of Appreciated Property

A sale of appreciated property to a philanthropy for less than fair market value allows you to claim a charitable deduction while receiving proceeds from the sale. However, you must pay a tax on part of the gain attributed to the sale. That is, the transaction is broken down into two parts: the sale and the gift.

To compute gain on the sale, you allocate the adjusted basis of the property between the sale and the gift following these steps:

Step 1. Divide the sales proceeds by the fair market value of the property. If the property is mortgaged, include the outstanding debt as sale proceeds.

Step 2. Apply the Step 1 percentage to the adjusted basis of the property. This is the portion of basis allocated to the sale.

Step 3. Deduct the resulting basis of Step 2 from the sales proceeds to find the gain.

You may deduct the donated appreciation if full market value would be deductible on a straight donation (no sale) under the rules in 14.6. Thus, the donated appreciation is deductible if the property is securities or real estate held long term or long-term tangible personal property related to the charity’s exempt function; see Example 1 below. However, if a deduction for the property (assuming no sale) would be reduced to cost basis as discussed in 14.6, your charitable deduction on the sale is also reduced; see Example 2 below. This reduction affects sales of capital gain property held short term; ordinary income property; tangible ...