The commercial real estate market experiences highs and lows as the economic trends shift due to politics, policies or other economic events. As brokers, continuously adding a few new options to the repertoire may help improve client relationships and grow the company. The IRS Section 170 Bargain Sale is becoming more in-demand by clients who want to minimize tax exposure. The Bargain Sale may be for such clients looking to sell performing assets or underutilized and distressed properties.
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A qualified appraiser must perform the Bargain Sale valuation. The asset is compared to other property that is fully performing in the same or neighboring market. This valuation’s outcome may be higher than the original listing price. To learn more, please read an earlier post How Bargain Sale Valuations Work.
About the Bargain Sale
The IRS Section 170 Bargain Sale originates from the War Revenue Act of 1917 that the United States Government passed. It shares some similarities with the well-known 1031 Exchange, where the tax code is used to protect wealth and economic growth. However, there is a notable difference between a Bargain Sale and the 1031 Exchange. Instead of just deferring taxes, like 1031, the Bargain Sale provides immediate tax benefits that can be used the same year as the transaction and up to 5 additional years.
Nonprofit Qualifications
The Bargain Sale made to a nonprofit entity that is federally recognized by the 501(c)(3) criteria. It is considered best practice for the nonprofit to obtain validation from one of the charity monitoring organizations. These organizations, like GuideStar, rank the nonprofits based on the use of funds, fundraising, board members and activities related to their causes. All information about the nonprofits may be found on the monitoring agencies’ websites. This action provides transparency and allows Sellers to determine if they want to complete a transaction with the nonprofit.
Bargain Sale is “Not” a Donation
Although there must be a donative intent, combining the cash received at closing with a tax rebate, the Bargain Sale’s benefits may be immense. It is important to note that the Bargain Sale is not a donation. Cash is received at closing and is combined with the tax deduction benefit of the contribution between the appraised value and the cash received.
However, some transactions may have the appearance of a donation as the seller may decide to not take any cash in the transaction. As a result, commercial buyers may find themselves saving significant amounts of income tax by utilizing a Bargain Sale for their property disposition or tax strategy.
Searching for Assets
When taking advantage of the Bargain Sale for clients, brokers should consider looking for opportunities of almost any asset that has appreciated from its basis. By selling at a potentially higher valuation rate, as per the Bargain Sale terms, the broker may facilitate a win-win situation for the seller and the nonprofit organization. The seller gets the tax benefits, which is the difference in property value minus cash received at closing. Afterward, the nonprofit takes the property to either use or sell to raise funding for its charitable causes.
Brokers’ Incentives
As for the broker’s commission, it is based on the total financial benefit to the seller. As stated earlier, the total financial benefit is a combination of the cash amount and the federal and tax savings. The selling broker’s commission is usually based on the seller’s total financial benefit which is often near the list price.
Smart brokers looking to grow a business and their clients’ best interest should be informed about the Bargain Sale. Commercial transactions totaling over $8 billion are completed every year in the form of the IRS Section 170 Bargain Sale.
Welfont Can Help
Welfont has a wealth of experience with the Bargain Sale. We are the experts with over 10 million square feet of acquisition in more than 30 states. We are familiar with the Bargain Sale Appraisal process and can help you achieve the most in cash and tax deductions for your asset. If you would like more information, please visit our FAQ page or email us at info@welfont.com. We can help provide answers for your specific property.
Written by The Welfont Group, LLC
