## Facts

- An individual taxpayer transferred unimproved real property to an organization qualifying under I.R.C. § 170(c).
- The property was a capital asset held for more than one year.
- On the transfer date, the property had a fair market value of 25x and an adjusted basis of 15x.
- The property was subject to an outstanding mortgage of 10x.
- The taxpayer received no cash or other consideration beyond the transfer of the property subject to the mortgage.
- The transfer was treated as a bargain sale: consideration of 10x (the mortgage) and a charitable contribution of 15x (FMV minus mortgage).

## Issues

1. How much gain must an individual recognize on a bargain sale of appreciated real property to a § 170(c) charitable organization when the property is transferred subject to a mortgage?
2. How is the taxpayer’s adjusted basis allocated between the sale portion and the gift portion under I.R.C. § 1011(b) and Treas. Reg. § 1.1011-2?

## Decision

- The mortgage (10x) is treated as an amount realized for purposes of the bargain sale rules, even if the charity does not assume or agree to pay the debt.
- The taxpayer’s basis allocable to the sale portion equals total adjusted basis multiplied by the ratio of amount realized to FMV: 15x × (10x/25x) = 6x.
- The taxpayer recognizes long-term capital gain equal to amount realized minus basis allocable to the sale portion: 10x − 6x = 4x.

## Legal Principles

- In a transfer that is partly a sale and partly a charitable gift, I.R.C. § 1011(b) requires allocating adjusted basis between the sale and gift portions for gain computation.
- Under Treas. Reg. § 1.1011-2(b), the basis used to compute gain on the sale portion is the pro rata share of total basis determined by the ratio of amount realized to the property’s FMV.
- Under Treas. Reg. § 1.1011-2(a)(3), when property is transferred subject to indebtedness, the indebtedness is treated as amount realized for applying the bargain sale/basis allocation rules, even without a formal assumption by the transferee.
- For § 170 purposes in a charitable bargain sale, the contribution component equals FMV minus the amount realized.

## Conclusion

When appreciated real property is transferred to a qualified charity subject to a mortgage in a bargain sale, the mortgage is treated as consideration (amount realized), basis is allocated pro rata to the sale portion under § 1011(b) and Treas. Reg. § 1.1011-2, and the donor recognizes long-term capital gain on the sale portion (4x in the ruling’s example).


Rev. Rul. 81-163, 1981-1 C.B. 433 (1981)