What Is a Bargain Sale? Basis, Deduction Limits, and Recapture

A bargain sale to charity is a transaction in which you transfer property to a qualified charity for less than its fair market value, and the IRS splits it into two pieces: a sale that can produce taxable gain and a gift that can generate a charitable deduction. The wrinkle most people miss is that your cost basis gets divided between those two pieces, so the gain you report on the sale side is almost always larger than if you had sold the same property to a private buyer at the same price.¹

The Two Halves of the Transaction

The sale portion works like any other property sale. You compare what you received to the basis allocated to that side, and the difference is gain. The gift portion works like any other noncash charitable contribution. You calculate the donated value and claim a deduction, subject to income-based ceilings. You don’t get to pick one treatment or the other. Both apply, on the same transaction, in the same tax year.¹

How Basis Gets Allocated

Under federal tax law, your adjusted basis is divided proportionally between the sale portion and the gift portion.² Only the slice assigned to the sale reduces your taxable gain. The rest attaches to the gift portion and gives you no further tax benefit.

The formula: multiply your total adjusted basis by the ratio of the sale price to fair market value. That’s the basis allocated to the sale. Subtract it from the sale price to get your recognized gain.

Worked Example

You own investment property worth $100,000 with an adjusted basis of $40,000. You sell it to a qualifying charity for $50,000. The sale-to-value ratio is 50%, so $20,000 of your $40,000 basis goes to the sale side. Your recognized gain is $30,000. If you had sold the same property to a private buyer for $50,000, your gain would have been only $10,000. The basis allocation rule nearly tripled the taxable gain.

The charitable deduction is the $50,000 gift portion. The other $20,000 of basis, the piece assigned to the gift, is permanently gone. You can’t deduct it and can’t use it to offset anything else. This is the hidden cost of a bargain sale, and it’s why the overall tax math needs modeling before you commit.

What You Can Actually Deduct

The size of your charitable deduction depends on the type of property and how long you held it.

Capital Gain Property

If the property would have generated a long-term capital gain on a straight sale, you generally deduct the full fair market value of the gift portion. Most appreciated assets fit: stocks held longer than a year, investment real estate, and similar holdings. The appreciation attributed to the gift portion never gets taxed.

Ordinary Income Property

Property that would have produced ordinary income or short-term capital gain gets less generous treatment. The deduction is reduced by the amount of gain that would not have been long-term capital gain, which usually caps the deduction at the property’s adjusted basis rather than its fair market value.³ This hits inventory, assets held less than a year, and property with significant depreciation recapture. Publication 526 gives the pattern directly: sell ordinary income property worth $10,000 to a charity for $2,000 with a $4,000 basis, and the deduction is the adjusted basis of the gift portion, $3,200, not the $8,000 gap between value and price.¹

Tangible Personal Property and Related Use

For tangible items like artwork, jewelry, or collectibles, you get the full fair-market-value deduction only if the charity will use the property in a way related to its exempt mission. A painting donated to a museum for its permanent collection qualifies. The same painting donated to a food bank that plans to auction it does not.³ When the use is unrelated, or when the charity sells the property before year-end without certifying a related use, the deduction drops just like ordinary income property. Get the charity’s written confirmation of intended use before finalizing the transaction.

Depreciation Recapture on Real Estate

Rental and commercial real estate carry an extra step because of depreciation. Calculate the recapture as if you had sold at full fair market value, then allocate that recapture 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.⁴

Numbers: rental property worth $200,000, original cost $150,000, depreciation claimed $50,000, adjusted basis $100,000. You sell to a charity for $100,000. The sale ratio is 50%, so basis allocated to the sale is $50,000 and total recognized gain is $50,000. At a full $200,000 sale, $50,000 of gain would trace to depreciation; allocating half to the sale side gives $25,000 of unrecaptured depreciation gain taxed at a maximum 25% rate, with the remaining $25,000 taxed as long-term capital gain.⁵ The charitable deduction is the $100,000 gift portion.

Income Ceilings and Carryforward

You can’t deduct the entire gift portion in a single year if it’s large relative to your income. The tax code caps charitable deductions at a percentage of your adjusted gross income:

30% of AGI for contributions of capital gain property to public charities.⁶
60% of AGI for cash contributions to public charities. This ceiling, originally temporary under the 2017 tax law, was made permanent starting in 2026.
20% of AGI for contributions of capital gain property to private foundations.

Because most bargain sales involve appreciated property, the 30% ceiling is usually the one that governs the gift portion. Excess amounts carry forward for up to five additional tax years.⁶

2026 Changes

Legislation enacted in 2025 introduced changes starting in the 2026 tax year. A new floor makes only charitable contributions exceeding 0.5% of AGI deductible; for someone earning $300,000, the first $1,500 of total giving doesn’t count. Taxpayers in the top income bracket can deduct charitable contributions at a 35% rate rather than the bracket’s 37% rate, slightly reducing the dollar-for-dollar tax savings.

Mortgaged Property Triggers a Bargain Sale Automatically

This catches donors off guard. 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 doesn’t formally assume the loan. The outstanding balance counts as your amount realized and triggers bargain sale treatment automatically.⁷

Transfer a $300,000 property with a $100,000 mortgage balance and the IRS sees $100,000 of consideration. You must allocate basis using that $100,000 as the sale price and report any resulting gain. Many donors discover this only at tax time. Model the gain with your tax advisor before donating encumbered property, and consider paying off the mortgage first if the numbers support it.

Documentation and Appraisal

Bargain sales combine the paperwork of a property sale with that of a charitable contribution. Missing a layer can cost you the entire deduction.

For any contribution of $250 or more, you need a written acknowledgment from the charity before you file. The letter must state what cash you received, describe the property, and confirm what the charity provided in return.⁸ In a bargain sale, the charity did provide something (the sale price), so the acknowledgment should state that amount.

When the noncash gift portion exceeds $500, file Form 8283 with your return.⁹ 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.¹⁰

A qualified appraisal is mandatory when the gift portion exceeds $5,000 in claimed value.¹¹ The appraiser must hold recognized professional credentials and cannot be the donor, the charity, or anyone otherwise involved in the transaction. The appraisal 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.¹² Professional appraisals for commercial or investment real estate commonly run between $2,000 and $10,000. Build that cost into your planning.

Overvaluation Penalties

Overstating fair market value doesn’t just risk losing the deduction. It can trigger accuracy-related penalties. If the value you claimed is 150% or more of the correct value and the resulting underpayment exceeds $5,000, the IRS can impose a 20% penalty on the underpayment attributable to the overstatement. If the claimed value is 200% or more of the correct value, the penalty doubles to 40%.¹³

The IRS scrutinizes charitable contribution appraisals closely, and bargain sales of hard-to-value property (real estate, art, closely held business interests) are frequent audit targets. Saving money on the appraiser is the worst place to cut corners.

1
Internal Revenue Service. Publication 526 – Charitable Contributions
2
Office of the Law Revision Counsel. 26 U.S. Code 1011 – Adjusted Basis for Determining Gain or Loss
3
Office of the Law Revision Counsel. 26 USC 170 – Charitable, Etc., Contributions and Gifts
4
Internal Revenue Service. Publication 544 – Sales and Other Dispositions of Assets
5
Internal Revenue Service. Topic No. 409 – Capital Gains and Losses
6
Office of the Law Revision Counsel. 26 U.S. Code 170 – Charitable, Etc., Contributions and Gifts
7
eCFR. 26 CFR Part 1 – Basis Rules of General Application
8
Internal Revenue Service. Charitable Contributions – Written Acknowledgments
9
Internal Revenue Service. About Form 8283, Noncash Charitable Contributions
10
Internal Revenue Service. Instructions for Form 8283
11
Internal Revenue Service. Charitable Organizations – Substantiating Noncash Contributions
12
eCFR. 26 CFR 1.170A-17 – Qualified Appraisal and Qualified Appraiser
13
Office of the Law Revision Counsel. 26 USC 6662 – Imposition of Accuracy-Related Penalty