by Joseph Garnett | Oct 1, 2018 | Copyeditng
Edited by Joseph Garnett, Jr.
Walk Away with a Greater Profit with a 170 Exchange or Bargain Sale
Bargain Sale profits can be higher than those from traditional sales.
“Actually, bargain sales don’t mean you’re losing money,” asserts this headline from a recent blog post by Douglas A. McCullough, Vice President of NAI Chase Commercial brokerage division.
His post confirms that a 170 Exchange, otherwise known as a Bargain Sale, can net a Seller more in the long run than a typical sale. “Many times, a traditional market approach doesn’t produce the desired result for the seller. The market demand may not be sufficient, or the market may be soft. A bargain sale approach may be the answer,” says McCullough.
Have you heard of the term “Bargain Sale”? Its name implies the buyer is getting a deal but not so much for the seller. However, under the IRS 170 regulation, the seller can essentially profit more than from a traditional sale, especially when a commercial property has been up for sale for a long time.
In his position at NAI Chase Commercial, McCullough certainly knows what he’s talking about when he explains, “Bargain sales occur when a property is sold to a charitable organization for less than the fair market value. The bargain sale will result in a charitable gift for the buyer, and a charitable contribution income tax deduction for the seller. This scenario is why a bargain sale approach could, for the right seller, generate a higher transaction value than a traditional sale approach.”
The Process of a Bargain Sale
The Welfont Group uses this tax strategy, the 170 Exchange, for many clients, to good advantage, especially in the case of those with a significant tax burden. The IRS Tax Code Section 170 was voted into law by the Federal government in 1917 to encourage philanthropy, by awarding a charitable contribution deduction to entities who donate the property to a qualifying nonprofit. Both structures and land qualify. Through these transactions, many charities have acquired buildings and land, which they have then repurposed to fit their own needs. Consequently, a fair number of companies and individuals have offloaded non-viable holdings, receiving cash at closing and a significant tax write-off. It’s a win-win situation for both parties.
Bargain Sale Requirements
- The buyer must be a qualified tax-exempt nonprofit.
- The seller must obtain a qualified appraisal if the asset is valued over $5,000 to determine fair market value.
- The seller may deduct the difference of the appraised value and sale price as a charitable contribution, receiving a tax deduction.
- The charitable deduction does, in fact, the equal cash infusion by relieving the seller of making a tax payment.
Fair market value is generally higher than a traditional appraisal because of temporary down market conditions and the need for a distressed sale. These factors are not part of the equation in an FMV appraisal for a 170 transaction. This price difference ultimately nets the seller a higher charitable donation value. Again, to benefit both parties, the seller must have, or have within five years, a corresponding tax burden. The deduction can be spread over that time frame and can be part of a long-term tax plan.
Conclusion
Welfont enjoys seeing McCullough’s post describe what they already do: create value for clients through a Bargain Sale. As the leader in 170 Exchange transactions, Welfont has $200 million in these deals. Welfont’s professionals can guide you through the process, helping you dispose of a white elephant property, solving a cash flow problem, and benefiting a nonprofit. We have made resources available to you online: a FAQ page and a video. Click here to visit our website at The Welfont Group. Take that first step towards tax relief and cash infusion. You can read McCullough’s full post by clicking here.
Through these transactions, many charities have acquired buildings and land which they have then repurposed to fit their own needs. Consequently, a fair number of companies and individuals have offloaded non-viable holdings, receiving cash at closing and a significant tax write-off. It’s a win-win situation for both parties.
Bargain Sale Requirements
- The Buyer must be a qualified tax-exempt nonprofit.
- The Seller must obtain a qualified appraisal if the asset is valued over $5,000 to determine fair market value.
- The Seller may deduct the difference of the appraised value and sale price, as a charitable contribution, receiving a tax deduction.
- The charitable deduction does, in fact, the equal cash infusion by relieving the Seller of making a tax payment.
Fair market value is generally higher than a traditional appraisal because of temporary down market conditions and the need for a distressed sale. These factors are not part of the equation in an FMV appraisal for a 170 transaction. This ultimately nets the Seller a higher charitable donation value. Again, to benefit both parties, the Seller must have, or have within five years, a corresponding tax burden. The deduction can be spread over that time frame and can be part of a long-term tax plan.
Conclusion
Welfont was gratified to see McCullough’s post describe what they already do: create value for clients through a Bargain Sale. As the leader in 170 Exchange transactions, Welfont has $200 million in these deals under its belt. Welfont’s professionals can guide you through the process, helping you dispose of a white elephant property, solving a cash flow problem, and benefiting a nonprofit.
We have made resources available to you online: a FAQ page and a video. Click here to visit our website at The Welfont Group. Take that first step towards tax relief and cash infusion.
You can read McCullough’s full post by clicking here.
by Joseph Garnett | Oct 1, 2018 | Copyeditng
Edited by Joseph Garnett, Jr.
170 Transaction Can Reap Positive Results for All
A 170 Exchange often benefits all parties of the transaction, and it also possibly impacts the economy as a whole. Sometimes, during a real estate transaction, only the seller receives any significant economic boost. The buyer usually may have to rely on a bank loan and, therefore, creates debt. However, with a 170 Exchange, everyone who participates in the transaction will possibly leave with a better economic perspective.
The Seller
As the economic benefit spreads through a 170 Exchange, the seller may be the first person to benefit. The seller may own an underutilized or underperforming property. Perhaps it is an old warehouse that is costing more to maintain than it is bringing in. Or it could be a weak investment property where the costs outweigh the benefits.
So, the owner decides to sell and utilizes a 170 Exchange. The seller can then remove the property from their portfolio for a lower cost, but reap the benefits of possibly receiving the full ideal use value as a tax deduction. This process takes a hard-to-sell property is off their hands, but they likely receive the full valuation amount as a tax deduction. By selling a property this way, all parties involved may benefit from the transaction.
The 170 Exchange generally impacts the economy positively, by potentially bringing cash to the seller and discounted assets to the buyer.
The Buyer
The nonprofit 501(c)(3) buyer may also benefit economically from this transaction. They can purchase a property to use, or as a portfolio item to boost their assets, at a reduced cost. The reduced price is vital as it enables the not-for-profits to spend their money wisely and keep as much as they can to continue doing their charitable work. The economic benefit of this transaction can mean that the charity has more money in its pocket and also has a property that they can utilize or enjoy the benefits.
The Community
The local community may also be fortunate enough to benefit from a 170 Transaction. The economic benefit from the seller can be felt throughout the city by wage increases, and better work conditions from the tax benefit. By legally reducing taxes, the seller may have the ability to spend more on workers and processes to ensure the business is growing.
Secondly, by selling a disused property, the area can be revitalized and bring in new work opportunities for locals. Revitalizing under-performing properties may also raise land values for locals and potentially provide economic benefits through that revenue stream as well.
170 Exchange Impacts the Economy
Lastly, the community may feel the economic impact of a 170 Exchange by the cash flow that comes with any property sale. A significant property sale in the local area may bring new income, possibly flowing through the community.
In general, a 170 Exchange impacts the economy and possibly benefits all parties involved in the transaction. Fortunately, the local community may also enjoy the financial gain. This process demonstrates how the economic impact of a 170 Exchange is positive. Real estate brokers wanting to do something good for the community should consider presenting the transaction to their clients.
by Joseph Garnett | Oct 1, 2018 | Copyeditng
Edited by Joseph Garnett, Jr.
What is a 170 Exchange?
The 170 Exchange, also known as a Bargain Sale, was created by Congress and is overseen by the IRS. A 170 Exchange is an IRS-approved transaction that allows a property seller to receive some cash at closing for their property. But more importantly, it enables a seller to save money that’s typically spent on income taxes. How? In addition to cash, the property seller receives a sizable tax deduction from the nonprofit that acquires it.
How is a 170 Exchange different from a traditional sale?
There are two main ways that a 170 Exchange transaction is different from a traditional sale:
- A 170 Exchange uses more than one method to determine the Opinion of Value (the actual worth of the building). A conventional deal will typically set the price of a property based on the value of similar properties nearby. Often, this means that a property will go on the market for less than it is worth.
A 170 Exchange permits appraisal of the building for its “Best and Highest Use.” The process includes three different types of evaluations rolled into one. Once appraised for a 170 Exchange, the property’s value can almost double based on the IRS Publication 561 appraisal methodology.
- In a traditional sale, sellers may pay anywhere from ¼ to almost ½ of their profits from the sale in taxes. In a 170 Exchange transaction, the seller is donating the building to a qualified nonprofit. Instead of paying huge taxes, they receive a significant tax write-off for their property donation.
Where does my nonprofit fit in the process?
170 Exchange transactions require nonprofits to partner with, and that’s where you come in. As a nonprofit, you will never have to put up a single penny on any of these real estate transactions. You may never have to deal with the logistics of the donation or closing. You can either keep the donated property or find a new buyer for the donated property. Most nonprofit partners will opt to have the property resold and receive the net proceeds of the sale.
So what makes a nonprofit a good fit?
The right nonprofit is well established, one whose mission can be supported by the brokerage and their corporate clients. Brokers are looking for diverse nonprofits that support various causes around the US and internationally so that the seller has a broader choice of nonprofits.
So what does the process look like for you as a nonprofit?
A brokerage specializing in 170 Exchange transactions can manage the entire process and provide 100% of the funding needed for acquisition and disposition (selling/renting/disposing of the building) through investors. In many cases, the nonprofit is not responsible for providing or guaranteeing funds. The net proceeds after all expenses, like selling the building, cash put into the deal for the seller, etc.), remain with the nonprofit.
It is that simple. The 170 bargain sale is an excellent opportunity for your nonprofit to participate in the over $8 billion of 170 Exchange transactions that are processed every year.
