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The Divorce Encyclopedia
Bargain Sale

Term Definition Bargain Sale - it can make a difference.
Application in Divorce Instead of an outright gift, some people (usually parents and often for estate or tax planning) sell property to someone (often an adult child) at a price well below the market. This can often happen when parents sell a house or a farm to their married children at what is termed a "bargain" price.

Problems can develop if the adult child’s marriage crashes. Dual classification states treat gifts as separate property; all property states often divide them unequally. Thus, the spouse of a recipient of bargain sale property may well argue that the gift was not a gift but in fact a sale -- and thus marital property, particularly if the transaction used some martial funds.

For tax purposes, the Internal Revenue separates a gift sale into a gift component, which is the fair market value minus the sale price, and the sales component, and taxes each separately. This is known as a partial gift -- "when a bargain sale is made with actual donative intent."

In general, courts recognize the idea of a "partial" gift, i.e., the difference between the actual price paid and the fair market value of the property. When accompanied by a donative intent, which is a requirement for a gift, courts in dual classification jurisdictions recognize that part of the property may be a gift, and thus separate property of the recipient, and part of the property may be marital, and thus subject to distribution. Federal tax law recognizes a partial gift; however, in cases of equitable division, not all courts have held that the bargain sale is in fact a partial gift.

The determination that a bargain sale is in a part a gift has ramifications, not only in the classification and division of property in the event of a divorce by the recipient and his or her spouse, but also to the seller/donor, who should realize that such property may become marital.

Sometimes the donor of a partial gift makes it because the tax consequences of a "bargain sale" and more favorable than the tax consequences of an outright gift. A divorce by the recipient may create and unforeseen tax exposure on the part of donor.

See also Interspousal Gifts.

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