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What is a bargain sale?
A bargain sale refers to the selling of a good or service for an amount less than the fair market value. It can be considered a donation to a charity and may result in a tax write-off.
A bargain sale is a contract that involves selling commodities at lower prices than normal. They are usually used by donors intending to make non-cash donations to charity organizations. Occasionally, the property transferred can be exchanged for similar property with a lower value. The difference is considered to be the gift.
If the exchanged property has an appreciated value, it will be necessary to divide the cost basis proportionately between the traded portion of the property and the donated remainder. The gain on the property sold is reported as income, while the granted part is written off as a donation (within the limits of contributions to charities for appreciated property).
There are no specified limits on the kind of assets that qualify for bargain sale. A donor who sells a property to a nonprofit organization under this scheme is entitled to a tax deduction for the difference between the appraised value and the selling price. The major benefits of carrying out bargain sale transactions include:
- The sale offers a quick method of getting cash that can be reinvested in other more profitable property and ventures.
- The deductions from the donated asset can lower the seller’s tax bill.
- Charity organizations will benefit from the donated assets, which will further their mission and activities.
- The seller does not pay capital gains tax on the gift to the charity organization.
Bargain sale example
A food store sells food commodities to a nonprofit children’s home for $10,000, but the products are worth $20,000. In this case, the food store is said to have made a bargain sale because it will have sold the commodities at a lower price than the market value. Because the food is sold to a nonprofit children’s home, the difference is considered a contribution to charity.
Here are some tips on how to receive tax deductions when you carry out a bargain sale.