170 Exchange – What is a Bargain Sale and How Can It Save You Money?
Many of us would like to be able to donate in a meaningful way to nonprofit organizations to support the communities in which we live. It is not always possible or practical to donate large sums of money, and in that case, you may be in a position to consider donating real estate under the IRS provisions for bargain sales under section 170.
If this is something that you might consider, then you should definitely seek expert guidance from professionals with experience in conducting 170 Exchange transactions as these can be complex. Here are some basics about bargain sales to help you understand if this is the right option for you.
What is a bargain sale?
A bargain sale is a real estate transaction in which the owner of a property (the “donor”) sells a property to a charitable organization for less than the fair market price of the property, hence the notion of the “bargain.” For the donor, the total difference or a portion of the difference between the fair market value and the sale price is considered to be a charitable contribution which may be counted as a deduction on the donor’s taxes – the greater the difference, the greater the contribution and thus the greater the potential deductions.
There are a number of considerations that can affect how much of the difference between the bargain price and the fair market value price can be claimed as a charitable deduction by the donor. The determination of the “gift portion” of that difference will take account of the type of charitable organization (contributions could be limited to a percentage of the donor’s income), and also whether there is a mortgage in place on the property.
Transparent Charitable Intentions
One key requirement is that the intention of the donor to make a charitable donation of the eligible difference between the sale price and the market price must be made very explicit. Moreover, the charitable intent must be established before the transaction is made.
There have been cases in which the IRS has denied bargain sale deductions because they were deemed to have been primarily motivated by profit. For this reason, it is very important to carefully document the owner’s charitable intentions. Owners should also be aware that extensive negotiations with the nonprofit over the sale price could be taken as evidence of a non-charitable intent even if there is a statement to the contrary.
In order to qualify for the 170 exchange tax rebate, the buyer must be a on the list of federally recognized 501(c)(3) entities – these are the only non-profits that are allowed to participate in their bargain sales. This category of nonprofit organization includes religious, educational, charitable, scientific and literary organizations among others.
Because of the complexity of 170 exchanges, many people may overlook them as a way to benefit both the seller/donor and the charitable organization in meaningful ways. These transactions are not suitable for everyone, but if you have the right property and charitable intentions, be sure to speak to a bargain sale expert to find out if this is a good option for you.