Charitable Bargain Sale vs a 1031 Exchange

A bargain sale trades part of the price for a deduction; an exchange keeps the full price working

IRS Publication 526 defines a bargain sale as "a sale or exchange for less than the property's FMV" and says one made to a qualified organization "is partly a charitable contribution and partly a sale or exchange." You receive cash for the sale part and a deduction for the rest.

An exchange does something else entirely. Section 1031(a)(1) defers all the gain when real property is exchanged for like-kind real property, so the full value keeps working for you and nothing goes to charity.

The comparison is not about which saves more tax. A bargain sale gives away real value in return for a deduction worth only your marginal rate on it. It makes sense when the gift is something you wanted to make anyway.

Basis is split in proportion to the price, so the sale part shows a gain even below your basis

Section 1011(b) says that when a sale produces a charitable deduction, the basis used to compute gain is "that portion of the adjusted basis which bears the same ratio to the adjusted basis as the amount realized bears to the fair market value of the property."

IRS Publication 544 puts it plainly: "you will have a gain even if the amount realized is not more than your adjusted basis." Its example sells $10,000 property with a $4,000 basis to a charity for $2,000; only $800 of basis is allocated to the sale, and the gain is $1,200.

One exception runs the other way. Under Reg. section 1.1011-2(a)(1), if no deduction is allowable at all after the percentage limits, the basis is not split and the whole basis offsets the price. A contribution carried forward still counts as allowable, so the split applies in that case.

The deduction is the gifted value, trimmed for recapture and capped each year

Publication 526 figures the contribution in three steps: subtract the price from fair market value, allocate basis to the gifted part, then use fair market value for capital gain property or basis for ordinary income property. Real estate held more than a year is generally capital gain property.

Section 170(e)(1)(A) reduces the deduction by any gain that "would not have been long-term capital gain" if you had sold the property. On real estate that means ordinary recapture, which is usually small for straight-line buildings and larger after cost segregation.

The limits then apply. Section 170(b)(1)(C) caps capital gain property given to a public charity at 30% of your contribution base, which is adjusted gross income, and carries the excess forward for five years. From 2026, section 170(b)(1)(I) allows contributions only above 0.5% of contribution base, and section 68 trims itemized deductions by 2/37 for income reaching the 37% bracket. A deduction over $5,000 needs a qualified appraisal under section 170(f)(11)(C), and Publication 526 lists 20% and 40% penalties for overstated values.

Worked example: $1,000,000 of land sold to a charity for $400,000

These are hypothetical round numbers. A couple owns investment land worth $1,000,000 with a $200,000 basis, held for decades, no mortgage. They have $250,000 of other income.

• Bargain sale at $400,000: basis allocated to the sale is $200,000 × ($400,000 ÷ $1,000,000) = $80,000, so the recognized gain is $320,000.
• Contribution: $1,000,000 − $400,000 = $600,000 of fair market value given. Land has no depreciation, so nothing is trimmed under section 170(e)(1)(A).
• Limit: adjusted gross income of about $570,000 allows roughly $171,000 of the gift in year one; the remaining $429,000 carries forward for up to five years, subject to the same cap each year.
• Outright sale for $1,000,000: an $800,000 gain, all taxable in the year of sale, against the 2026 joint 20% breakpoint of $613,700 in Rev. Proc. 2025-32.
• 1031 exchange: $1,000,000 reinvested in like-kind real property, $0 recognized, $200,000 basis carried over.
• Run your own numbers with your CPA; whether the deduction is fully used depends on your income over the carryover years.

A mortgage turns even an outright gift into a bargain sale

Reg. section 1.1011-2(a)(3) says that when property is transferred subject to debt, "the amount of the indebtedness must be treated as an amount realized," even if the charity does not assume it. Publication 526 adds that you also reduce the value of the gift by the debt.

So a donor who hands over a $1,000,000 building carrying a $300,000 loan has made a bargain sale for $300,000, with a recognized gain on that slice. Many owners discover this only after the deed is signed.

Debt is also the main obstacle in exchanges, for the opposite reason: debt paid off at closing must be replaced or offset with cash. See replacing a mortgage or adding cash.

Who a bargain sale fits, and how it sits beside an exchange

A bargain sale fits an owner who has a specific charity that wants the property, needs some cash rather than none, and itemizes deductions with enough income to use the deduction within six years. It fits poorly when the charity would have to resell a hard-to-sell property or when a large mortgage turns the gift into mostly sale.

If you want income for life and a gift at the end, a charitable remainder trust sells without trust-level tax and pays you an annuity or unitrust amount instead of a lump sum.

The two tools can also split a portfolio. One parcel goes to charity at a bargain price; the rest is exchanged into traditional DST interests or other real property, which keeps that gain deferred and passes a stepped-up basis to heirs. DSTs are illiquid and depend on the sponsor and tenants, so weigh those risks before you commit the proceeds.