D.7. Bargain Sales
     January 1989

Development Policy and Administration Manual 
Chapter IV. Gift Administration Procedures 
Section D. Special Procedures for Various Types of 
           Noncash Gifts 
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                               BARGAIN SALES


A bargain sale occurs when a donor transfers property to a
charity in exchange for a payment that is less than the fair
market value of the property.  Typically, such transactions occur
when a donor has a piece of property that has appreciated greatly
in value that the donor cannot afford to part with as an outright
gift. 

In such cases, the gift is considered to be the amount by which
the fair market value exceeds the payment; however, the donor's
cost basis must be allocated to both the sale and the gift,
reducing the amount of the allowable charitable deduction.  

Gifts of real property that are transferred subject to a mortgage
are considered bargain sales by the IRS, the amount of the gift
being the fair market value of the property reduced by the amount
of the mortgage.  This is true even if the donor agrees to be
responsible for the mortgage.

It is sometimes difficult to distinguish between a bargain sale
and a discount, especially when tangible property is involved. 
In such cases, the IRS has held that a key element is that of
"detached and disintertested generosity", i.e., the donor's
intent must be to make a gift.  For example, in a recent tax
court case, a deduction for a bargain sale was disallowed because
the court found that the purchase price agreed upon by the donor
and the charity was primarily the outcome of business negoti-
ations.  Therefore, if a bargain sale is being arranged, it is
advisable that the donor and the University clearly document from
the outset the donor's intention to sell for less than the fair
market value, including a letter of gift from the donor and a
letter of acceptance by the University.