Bargain Sales, Gift Annuities and Pooled Income Funds

How it works

Three techniques sit next to the charitable moves I reach for first: bunching gifts into a donor-advised fund, a charitable remainder trust, and a qualified charitable distribution from an IRA. A bargain sale splits one transfer into part sale and part gift. A charitable gift annuity trades an asset for a lifetime fixed payment paid directly from a charity's own balance sheet, no trust required. A pooled income fund gives a smaller gift the deferred-income shape of a trust without the cost of running one. For most of my clients, the simpler tool wins; this page is for the fact patterns where it does not. Every benefit described here is federal, too, since Florida has no individual income tax of its own to offset.

Bargain sale to charity

A bargain sale is one transaction that is part sale and part gift. A donor transfers property to a section 170(c) charity for consideration, cash, an assumed mortgage, or an annuity promise, worth less than fair market value. The charity's payment, or the debt relief received, is the amount realized; the excess of fair market value over that amount is the charitable contribution.

Splitting one asset's basis between a taxable sale and a gift would ordinarily take two transactions. Section 1011(b) does it in one: basis is allocated between the sale and gift portions using the same ratio, the amount realized divided by fair market value. The wrinkle practitioners miss is debt relief: if a donor deeds a mortgaged property to a charity and takes no cash, the regulation still treats the outstanding debt as an amount realized, whether or not the charity formally assumes it, so treating that gift as gain-free understates the gain and overstates the deduction at once. It is also the cleanest way to convey debt-encumbered property to a charity, since most charities decline debt they would otherwise have to service.

Charitable gift annuity

A charitable gift annuity is a contract, not a trust. A donor transfers cash or property to a charity, which makes a general, unsecured promise from its own assets to pay the donor, and possibly a second annuitant, a fixed amount for life. There is no segregated fund and no trustee; the property becomes the charity's own general asset immediately. A charitable remainder trust is its own irrevocable entity with its own annual filing; a gift annuity is just a balance-sheet obligation, small enough to start on a short gift agreement.

The deduction is computed the same way as a bargain sale, because the regulations treat it as one: fair market value minus the present value of the annuity, valued under section 7520's monthly rate, electable across the current month or either of the two before it. Any gain on appreciated funding property spreads using that same ratio. Payments follow the ordinary annuity exclusion-ratio rules: part tax-free, or capital-gain-character, return of the donor's investment in the contract, part ordinary income, until recovered, after which every remaining payment is fully ordinary. Ratable spreading on a property-funded gift survives only if the annuity is nonassignable and payable solely to the donor or a named spouse or survivor; lose either condition and the whole sale-portion gain is taxed in the year of the gift instead.

A separate, once-in-a-lifetime election lets an IRA owner 70 and a half or older move qualified-charitable-distribution dollars directly into a properly structured gift annuity, inside a sub-limit counted within the regular annual qualified charitable distribution exclusion, both indexed annually. The annuity must begin paying five percent or more within a year, and the income interest can only run to the donor and a spouse. The trade is real: the transfer skips adjusted gross income entirely, but the statute denies any investment in the contract for an annuity funded this way, so every payment is fully ordinary income for life.

Pooled income fund

A pooled income fund is a trust the charity itself maintains, not one with a donor-selected trustee. It commingles irrevocable remainder gifts from many donors into one pool, similar in shape to a mutual fund for charitable remainder giving. The statute sets six conditions at once: an irrevocable remainder to a public charity with a retained life income interest; commingled property; no securities exempt from federal tax; every asset meeting these terms; the charity itself as trustee, never a donor or beneficiary; and a per-unit payout based on the fund's own earned return.

The deduction is valued differently than a gift annuity or trust: instead of an electable section 7520 rate, the income interest is valued off the fund's own highest yearly return for any of its three most recent taxable years. A fund under three years old has no such record, so the regulations substitute a formula: one percentage point below the highest of the prior three calendar years' average monthly section 7520 rate, a formula that has applied to every transfer since 1989.

Who this applies to

• Bargain sale to charity. Any donor of appreciated property, cash, securities, real estate, or a business interest, to a willing section 170(c) charity, including one taking on debt relief. It suits a donor needing some liquidity now who still wants gift-level deduction economics on the portion retained. Only long-term capital-gain property avoids a haircut; property that would have produced ordinary income if sold outright has its deduction cut by that same amount.
• Charitable gift annuity. Any donor of cash or property to a charity properly authorized to issue gift annuities, which in Florida means meeting the state's insurance-adjacent licensing standard. There is no federal minimum age, though issuers commonly set their own as underwriting practice. The one-time IRA election adds its own layer: the donor must be 70 and a half or older and must never have used it before.
• Pooled income fund. Only works if the donor's chosen charity actually operates one, which is increasingly rare; most Florida nonprofits, including nearly every one my clients name, do not, since a donor-advised fund now does the job more cheaply. Confirm the fund exists and qualifies before assuming this option is on the table.

What it requires

Bargain sale to charity

• A qualified appraisal for the noncash portion. Required once that portion exceeds $5,000, the same Form 8283 regime as any other noncash gift over that threshold. Publicly traded securities are exempt regardless of amount.
• A charity willing, and able, to take the debt. Many decline mortgaged real estate outright because of the tax exposure debt-financed property creates for the charity itself.
• No binding sale already in place. A pre-existing contract to sell the property to someone else can attribute the entire gain, not just the sale-portion gain, back to the donor under Revenue Ruling 78-197. Complete the charitable transfer first.
• The correct percentage-of-income limit. 30 percent of adjusted gross income for long-term capital-gain property to a public charity, 20 percent to a private foundation, on top of the 0.5-percent floor the One Big Beautiful Bill Act added in 2025, with a five-year carryforward for anything above the cap.

Charitable gift annuity

• State-law authority to issue the annuity. In Florida, five years of active operation and section 501(c)(3) status. The alternate path is narrower than it first looks: ten years wholly controlled by such an organization, and the controlled subunit itself a corporation or trust for at least two years, and a record of selling authorized annuity agreements in at least three other states without complaint. All three, not just the ten-year piece. Either path also carries a solvency test measuring admitted assets against reserves and a required surplus.
• Nonassignability, for a property-funded gift. To keep the ratable capital-gain spreading, the annuity must be nonassignable, or assignable only back to the charity, and payable only to the donor or a named spouse or survivor.
• A written acknowledgment stating the annuity's value. Disclosed separately from the deductible portion, since the donor receives something of value in return for the gift.
• For the IRA election, no prior use and a five-percent start within a year. The election works once in a taxpayer's lifetime, counted across every split-interest entity, and a deferred-payment annuity does not qualify for this route.

Pooled income fund

• Every structural condition, met at once. No tax-exempt securities, the charity itself as trustee rather than the donor or a beneficiary, commingled property, and a per-unit payout tied to the fund's own earned return.
• The fund's own rate history, or its deemed-rate calculation. A fund three years old or older is valued off its own highest trailing return; a younger fund is valued off Treasury's substitute formula, not the flat rate in the statute's original text.

What you need to document

Independent support for any valuation

A qualified appraisal for bargain-sale or gift-annuity property over the reporting threshold, and, for a pooled income fund, its trailing rate of return or deemed-rate computation for that year.

The gift instrument itself

The bargain-sale agreement describing the consideration and any debt assumed; the gift-annuity contract stating the payout rate, the annuitant, and that the annuity is nonassignable; the pooled-income-fund transfer statement describing the remainder interest given up.

The charity's written acknowledgment

For a gift annuity, one that separately discloses the annuity's value. For a bargain sale's gift portion, the same contemporaneous acknowledgment any other charitable gift needs.

Proof the issuing or administering charity itself qualifies

A gift-annuity issuer's state licensing and solvency standing; a pooled-income-fund's governing instrument showing it meets every structural requirement.

A running record of recovered investment in the contract

For a gift annuity, a year-by-year tally showing when the donor's investment in the contract is fully recovered, since every payment after that becomes fully ordinary income and the charity's own tax statement does not always flag the transition.

Where it goes wrong

None of these three vehicles is a listed or reportable transaction. Every one rests on decades-old regulations, or, for the IRA election, a fully implemented 2022 statute. What goes wrong here is execution, not aggression.

Bargain sale to charity

• Treating debt relief as if it were not there. The single most common execution error here: ignoring the mortgage a charity takes on understates the donor's gain and overstates the deduction at once, both correctable only by running the full basis ratio against the actual debt relief received.
• A missing appraisal or acknowledgment. Correct arithmetic does not save a deduction that lacks the substantiation the noncash-gift rules require.

Charitable gift annuity

• An assignable annuity, or the wrong annuitant. Either one forfeits the ratable-spreading treatment on a property-funded gift, and the entire sale-portion gain becomes taxable in the year of the gift instead of spread over the payment stream.
• Trusting the charity's reserves without checking them. A gift annuity is an unsecured, general obligation of the charity, not an insured or trust-segregated asset. Confirm the issuer's state-law standing first.
• A second attempt at the IRA election. It is truly one-time; a second election in a later year, even a partial one, simply fails, with no partial-use exception to fall back on.

Pooled income fund

• Defaulting to the statute's bare rate for a new fund. Treasury has prescribed a different, formula-driven rate for every transfer since 1989; using the old flat figure misstates the deduction.
• Assuming a pooled fund automatically qualifies. A fund holding tax-exempt securities, run by an outside trustee, or naming a donor or beneficiary as trustee fails the statutory definition, and the transfer becomes an ordinary taxable trust contribution instead.

A situation where this comes up

The version I see most often involves a retiree with both a traditional IRA and a block of long-held, highly appreciated stock, who wants a fixed income stream with a charity that has mattered to them for years. The question is rarely whether to do this. It is which asset to fund it with.

Funding the annuity from the IRA, under the one-time election, skips adjusted gross income entirely on the way in. No appraisal or Form 8283 is needed, since IRA dollars carry no basis to allocate. What that donor gives up is the exclusion ratio: every payment for life comes back as fully ordinary income, with none of the tax-free return of principal or capital-gain character a normally funded annuity would produce.

Funding the same annuity with appreciated stock instead produces an upfront deduction and spreads part of the built-in gain into the payment stream as capital-gain income for years, before it too turns ordinary once the investment in the contract is recovered, and it means reporting the gift on Form 8283. For a donor who itemizes and is not chasing this year's adjusted gross income, the stock-funded route is usually better. The IRA-funded election earns its place instead for the donor who needs the AGI reduction itself, someone watching a Social Security taxation threshold, an IRMAA bracket, or the net investment income tax.

A mortgaged property shows up less often, but when it does, the client usually wants to give a rental house or business property to a charity and cannot pay off the debt first, exactly the fact pattern the bargain-sale rules exist for. A pooled income fund almost never comes up in my practice, since the charities my clients support do not operate one; it stays on the list because, on the rare occasion a foundation does run one, its valuation works differently than everything else here.