Congress established the Bargain Sale, or 170 Exchange, and it is overseen by the Internal Revenue Service (IRS). Essentially, it is a transaction that the IRS approves, enabling the seller of a property to receive money when their property closes. Additionally, it enables them to save on their income taxes. This is only possible if the property is sold to a registered nonprofit organization, in which case it is tax deductible.
Difference between a Traditional Sale and a 170 Exchange
There are two big differences between traditional sale and a 170 exchange:
- There are different ways to work out the Opinion of Value, which is what the building is actually worth, with a 170 Exchange. In a traditional sale, the value is generally based on similar properties, even if that is therefore less than its actual value. The reason for this is that 170 Exchanges look at “Best and Highest Use” of a building, which includes three different types of appraisal. This means that the value can be doubled using the appraisal methodology in IRS Publication 561.
- When you sell your home through traditional means, you will have to pay tax on your profits, usually between ¼ and ½ of the profits you made. If you complete a 170 Exchange, however, you donate your building to a nonprofit. Hence, instead of having to pay a lot in taxes, you will receive a sizeable deduction instead.
The Issue of the Nonprofit
The biggest hurdle with the 170 Exchange transaction is that there has to be a partnership with a nonprofit organization. That said, nonprofits tend to be very interested in these transactions, as it means they don’t have to come up with any money either. In fact, nonprofits don’t even have to manage the administrative work involved with donations or closing. Once the property has exchanged, a nonprofit can decide to keep it for themselves, or they can ask their broker to sell it on for financial proceeds instead.
If you are selling your property, you have to find a good nonprofit to work with. You need to make sure that they have a mission that corporate clients and brokerage are able to support. You should not have any difficulties in finding a broker, as they actively look at diversifying their portfolio of clients both in this country and abroad. The benefit of that to you is that you will be able to take your pick of nonprofits.
It is vital that you work together with someone who specializes in these types of transactions to actually manage it. They will ensure that 100% of the funds required for disposition and acquisitions are made available through various investors. It is common to see nonprofits not having to guarantee any funds. After all of the expenses such as the costs of the deal and selling the building, are deducted from the sale price, the remaining money will be donated to the nonprofit.