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Partial Cash Payment or IRS Bargain Sale

This is a special circumstance that can be extremely beneficial if you want to donate something of significant value (like over $1,000) but because it is complex, and not widely used, I have to almost insist that you consult your CPA or tax preparer to make sure you are meeting the letter of the law.

Of course, you can also always call the IRS directly toll-free at 877-829-5500. That number will put you in touch with an IRS agent who knows how to identify charities that can accept cars for tax deductions, but they’re a good start to clarify any questions about bargain sales and partial cash payments.

Now that the disclaimer is out of the way, here’s the scoop: your donation can be classified as “partly a sale” and “partly a donation”, and certain donation processors and charities, like Action Donation, can assist you with both the sale and the donation part. In other words, you can get a bit of money AND a tax deduction when you donate a car, a boat, or any other valuable item.

The important point here is that not all charities or donation processors will offer you any money for your donation, and if you want this setup, you’ll have to find one that does offer some money. The charity benefits because they get a donation that worth quite a bit more than the average $300 car sold at auction, and you benefit because you get both the deduction and whatever the charity will offer you.

The “partial cash payment” is the amount the charity offers you for donating the item. Your deduction (the other part of the money involved here) is the difference between the value of the item and what the charity actually gets for the item when they sell it (this is also called the gross selling price). The value of the item is the “fair market value”, which is typically the Kelly Blue Book price for a car, or whatever a similar car has sold for in your area recently (check the classified). However, if the value of your item is more than $5000, then you’ll need to get an independent appraisal from an appraiser that the IRS recognizes, and you’ll need to get that appraisal in written form (though you never send it to the IRS, you just keep it in case they decide to take an interest in your donation). The other snag with value is that the car or item has to be worth at least $500, but you probably would not be going through all this hassle in the first place if your donation was worth less than $500.

IRS Bargain Sales are defined on page http://www.irs.gov/publications/p544/ch01.html of the IRS web site as “Bargain sales to charity. A bargain sale of the property to a charitable organization is partly a sale or exchange and partly a charitable contribution. If a charitable deduction for the contribution is allowable, you must allocate your adjusted basis in the property between the part sold and the part contributed based on the fair market value of each.”

Want an example? Let’s say you donate/sell a car worth $20000 to a charitable organization. The charity gives you $4000 for the car, thus “buying” the car from you for $4000. Here’s how your “adjusted basis” for the car would be calculated. Note that per the IRS “You have again if the amount realized is more than your adjusted basis in the property. However, you do not have a loss if the amount realized is less than the adjusted basis of the property. “

Sales price = $4000
Minus: Adjusted basis of part sold ($8,000 × ($4,000 ÷ $20,000)) = 1600
Gain on the sale = $4000 – 1600 = $2400

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