Did you know that it is possible to donate commercial real estate to a nonprofit organization in a way that not only provides the organization with a valuable asset but also provides the donor with a sizeable tax deduction? This is made possible through IRS Section 170 provisions on bargain sales. This option is not for everyone and it can be quite complex. For this reason, it is important to consult with 170 Exchange experts in order to make sure that your transaction will qualify. The potential benefits of this form of donation to charity can be significant, and it is well-worth the time to investigate whether this is a good option for you.
When a property is sold at a price that is below the fair market value to an eligible nonprofit organization, it may be considered a bargain sale if it meets the IRS requirements in Section 170. In this case, a portion of the difference between the sale price and the fair market price is considered to be a gift to the organization and the seller receives a corresponding deduction on his or her taxes in addition to cash from the sale. It is important to recognize that the determination of the gift portion of the exchange and the corresponding deduction will take account of a number of factors, including two appraisals to determine the fair market value of the property in question, and must be carefully calculated.
Eligible Buyers and Properties
Not just any organization may be a buyer in a 170 exchange. Only federally-recognized 501(c)(3) entities may benefit from bargain sales. These are nonprofit organizations addressing religious, educational, charitable, scientific and literary issues, or engage in testing for public safety, fostering national or international amateur sports competitions. It also includes organizations that work to prevent cruelty to animals or children. It is also important to bear in mind that there are certain kinds of property that are more suited to a 170 exchange, including commercial buildings, vacant land, industrial sites, warehouses and strip malls.
In order to qualify for 170 exchange deductions, it is vital that the donor has made it clear before the transaction takes place that it is his or her intention to donate the difference between the market price and the sale price to charity this should be carefully documented. If the IRS determines that the primary purpose of the transaction was to realize a profit, the deduction may be disallowed. 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.
As you can see, 170 exchanges can be quite complex and for this reason they may not be an obvious option for sellers. However, with the right guidance and support, significant tax benefits can be realized by sellers in addition to a cash payment for the sale. Further, the transaction brings clear benefits to organizations doing important charitable work. Given the win-win nature of 170 exchanges, it is well worth your time to investigate whether this is an option that could work for you.