Sometimes the real estate owner cannot afford to contribute the entire asset as an outright gift. In addition, it may be neither practical nor good economics to divide the property between a portion to be given and a portion to be retained or sold for gain.

A bargain sale may be the ideal solution. In a typical bargain sale arrangement, a building or parcel of land can be sold to the OSU Foundation at a price significantly below its fair market value but above its original cost. The difference between its appraised value and the selling price is the amount deductible for income tax purposes.

Capital gains taxation is reduced but not completely avoided in a bargain sale. However, the charitable contribution deduction usually exceeds the amount of capital gain, improving after-tax income during the year of the gift. Income in future years may also be improved when the initial net tax savings are invested in new assets providing a higher return than that received from the original property.

EXAMPLE: Frank Wilson is the owner of a commercial building with an appraised value of $190,000. His cost basis in the property is $80,000. If he sells the building to the OSU Foundation for $90,000, he will be entitled to a charitable contribution deduction of $100,000 (the difference between the fair market value and the bargain sale price). As a result, he will realize a capital gain of only $52,107 as opposed to $110,000 if he had sold the building outright. His $52,107 gain will be taken at the favorable 28% rate, yielding a tax liability of $14,590. This tax liability will be more than offset, however, by the charitable contribution deduction produced by the bargain sale.

If Mr. Wilson is in the 31% tax bracket, his $100,000 charitable deduction will save him $31,000, which otherwise could have gone to taxes. Add this to the $90,000 bargain sale price and subtract his reduced capital gains tax liability of approximately $14,590, and Mr. Wilson has $106,410 to reinvest as a result of his bargain sale. At the same time, he has made a magnificent $100,000 gift for the benefit of Oklahoma State University.