A bargain sale to charity is a transfer of property to a qualified charitable organization for a price below the property’s fair market value, and the IRS splits it into two transactions: a sale that can produce taxable gain and a gift that can produce a charitable deduction.1Internal Revenue Service. Publication 526 – Charitable Contributions You cannot treat the whole thing as a donation, and you cannot treat the whole thing as a sale. Each half carries its own tax consequences, and your cost basis gets divided between them in a way that usually makes the taxable gain larger than people expect.
How Your Basis Gets Split
The core rule is that your adjusted basis is allocated proportionally between the sale portion and the gift portion. Only the slice assigned to the sale reduces your taxable gain. The rest is absorbed by the gift portion and gives you no further tax benefit.2Office of the Law Revision Counsel. 26 U.S. Code 1011 – Adjusted Basis for Determining Gain or Loss
The formula is simple. Multiply your total adjusted basis by the ratio of the sale price to the property’s fair market value. That is the basis allocated to the sale. Subtract it from what you received, and the remainder is your recognized gain.
A Worked Example
Say you own investment property with a fair market value of $100,000 and an adjusted basis of $40,000. You sell it to a qualifying charity for $50,000. The sale-to-value ratio is 50 percent, so $20,000 of your $40,000 basis is allocated to the sale. Your recognized gain is $30,000 ($50,000 received minus $20,000 allocated basis).
If you had sold the same property outright to a private buyer for $50,000, your gain would have been just $10,000. The basis allocation rule nearly tripled the taxable gain. The charitable deduction, meanwhile, is the $50,000 gift portion (the $100,000 fair market value minus the $50,000 sale price). The remaining $20,000 of basis assigned to the gift portion is permanently gone. Model the full tax picture before you commit, because that lost basis is the hidden cost of the transaction.
How Much You Can Deduct
The size of your deduction turns on what kind of property you donated and how long you held it. The tax code draws a sharp line between property that would have produced long-term capital gain and property that would have produced ordinary income or short-term gain.
Capital Gain Property
If the property would have generated long-term capital gain had you sold it at fair market value, you generally deduct the full fair market value of the gift portion. Appreciated stock held longer than a year and long-held investment real estate typically fit here. You get a deduction based on current value without paying tax on the appreciation attributed to the gift portion.
Ordinary Income Property
Property that would have produced ordinary income or short-term capital gain gets reduced treatment. The deduction must be reduced by the gain that would not have been long-term capital gain.3Office of the Law Revision Counsel. 26 USC 170 – Charitable, Etc., Contributions and Gifts In practice that usually caps the deduction at the adjusted basis of the gift portion rather than its fair market value. This hits inventory, assets held under a year, and property with significant depreciation recapture.
IRS Publication 526 illustrates the point directly: sell ordinary income property worth $10,000 to a charity for $2,000 with a basis of $4,000, and the deduction is not the $8,000 spread. It is the adjusted basis of the gift portion, which works out to $3,200.1Internal Revenue Service. Publication 526 – Charitable Contributions
Tangible Personal Property and the Related-Use Rule
Donating tangible items like artwork, jewelry, or collectibles adds another layer. You only get the full fair-market-value deduction if the charity will use the property in a way related to its exempt mission. A painting given to a museum for its permanent collection qualifies. The same painting given to a food bank that plans to auction it off does not.3Office of the Law Revision Counsel. 26 USC 170 – Charitable, Etc., Contributions and Gifts When the use is unrelated, the deduction is reduced the same way as ordinary income property.
If the charity sells the tangible property before the end of the tax year of your donation without certifying a related use, the same reduction applies. Get the charity’s written confirmation of intended use before you close the transaction. If the charity disposes of the property within three years, it must file Form 8282 and send you a copy, and a quick sale can force you to amend a return that claimed the full value.4Internal Revenue Service. Form 8282 – Donee Information Return
Depreciation Recapture on Real Estate
Rental and commercial real estate add a complication. When you have claimed depreciation deductions, the IRS wants some of that back at sale. In a bargain sale, calculating recapture takes an extra step.
Figure recapture as though you sold the property at full fair market value. Then allocate that recapture amount between the sale and gift portions using the same ratio you used for basis. The ordinary income you report from recapture is the lesser of the recapture allocated to the sale or your total gain from the sale.5Internal Revenue Service. Publication 544 – Sales and Other Dispositions of Assets
Take a rental property worth $200,000. You paid $150,000 and claimed $50,000 in depreciation, so your adjusted basis is $100,000. You sell it to a charity for $100,000. The sale ratio is 50 percent, basis allocated to the sale is $50,000, and total recognized gain is $50,000. If you had sold at the full $200,000, $50,000 of the gain would trace to depreciation. Half of that, $25,000, is allocated to the sale portion. Because $25,000 is less than the $50,000 total gain, you report $25,000 as unrecaptured depreciation gain taxed at a maximum 25 percent rate, with the remaining $25,000 as long-term capital gain at standard rates.6Internal Revenue Service. Topic No. 409 – Capital Gains and Losses Your charitable deduction is the $100,000 gift portion.
AGI Limits and Carryforward
You cannot always deduct the full gift portion in one year. Charitable deductions are capped at a percentage of your adjusted gross income, and the cap depends on what you gave and to whom.
- 30 percent of AGI for capital gain property donated to public charities.7Office of the Law Revision Counsel. 26 U.S. Code 170 – Charitable, Etc., Contributions and Gifts
- 60 percent of AGI for cash contributions to public charities. This ceiling, originally temporary under the 2017 tax law, was made permanent starting in 2026.
- 20 percent of AGI for capital gain property donated to private foundations.
Because most bargain sales involve appreciated property rather than cash, the 30 percent ceiling is usually the one that governs. If your deduction exceeds the applicable ceiling, the excess carries forward for up to five additional tax years.7Office of the Law Revision Counsel. 26 U.S. Code 170 – Charitable, Etc., Contributions and Gifts
2026 Changes
Legislation enacted in 2025 changed charitable deductions starting in the 2026 tax year. Two changes matter for bargain sales. A new floor makes only contributions exceeding 0.5 percent of AGI deductible, so on a $300,000 AGI the first $1,500 of total giving no longer counts. And taxpayers in the top income bracket can only deduct charitable contributions at a 35 percent rate rather than the bracket’s 37 percent rate, slightly shrinking the tax savings on large gifts.
The Mortgage Trap
This catches more donors off guard than any other feature of bargain sale planning. If you donate property that carries a mortgage or other debt, the IRS treats the debt relief as money you received, even if the charity does not formally assume the loan. The outstanding balance counts as your amount realized and triggers bargain sale treatment automatically.8eCFR. 26 CFR Part 1 – Basis Rules of General Application
Donating mortgaged property for no stated price is not a pure gift. Transfer a property worth $300,000 with a $100,000 mortgage balance, and the IRS sees $100,000 of consideration. You allocate basis using that $100,000 as the sale price and report any resulting gain. Many donors discover this at tax time, owing tax on what they thought was an entirely charitable transfer. Before donating encumbered property, model the gain with your tax advisor and consider paying off the mortgage first if the math supports it.
Documentation and Appraisal
A bargain sale stacks the paperwork of a sale on top of the paperwork of a charitable contribution. Missing any layer can cost the deduction entirely.
For any contribution of $250 or more, you need written acknowledgment from the charity before you file your return, stating what you received, describing the property, and confirming what the charity provided in return.9Internal Revenue Service. Charitable Contributions – Written Acknowledgments In a bargain sale, the charity did provide something, so the acknowledgment should clearly state the sale price it paid.
When the noncash gift portion exceeds $500, file Form 8283 with your return.10Internal Revenue Service. About Form 8283, Noncash Charitable Contributions Section A covers gifts valued between $500 and $5,000. Section B applies when the claimed deduction exceeds $5,000 and requires both a qualified appraiser’s signature and a signed acknowledgment from the charity confirming receipt.11Internal Revenue Service. Instructions for Form 8283 Skipping the donee signature or filing the wrong section is a common way to lose the deduction.
A qualified appraisal is mandatory when the gift portion exceeds $5,000 in claimed value.12Internal Revenue Service. Charitable Organizations – Substantiating Noncash Contributions The appraiser must hold recognized professional credentials and cannot be the donor, the charity, or anyone else involved. The report must be signed and dated no earlier than 60 days before the contribution and no later than the due date (including extensions) of the return on which you first claim the deduction.13eCFR. 26 CFR 1.170A-17 – Qualified Appraisal and Qualified Appraiser It must include a full description of the property, the fair market value, the valuation method, and the appraiser’s qualifications and taxpayer identification number. For deductions over $500,000, attach the complete appraisal to your return.
Penalties for Overvaluation
Overstating fair market value can trigger accuracy-related penalties on top of losing the deduction. The IRS uses two tiers. A substantial misstatement, where the value you claimed is 150 percent or more of the correct value and the resulting underpayment exceeds $5,000, carries a 20 percent penalty on the underpayment attributable to the overstatement. A gross misstatement, where the claimed value is 200 percent or more of the correct value, doubles the penalty to 40 percent.14Office of the Law Revision Counsel. 26 USC 6662 – Imposition of Accuracy-Related Penalty The IRS scrutinizes charitable appraisals of real estate, art, and closely held business interests closely, so a defensible appraisal from a qualified professional is the main protection. Saving money on the appraiser is the worst place to cut corners.