IRC 170 Exchange: An Easy Luxury Home Exit Strategy
September 21, 2016
Real Estate Asset Manager, ASU Foundation For A New American University
Luxury listings often require a huge amount of patience (e.g., time on the market) and the fortitude to tackle deferred maintenance. For the right sellers (high-net worth individuals or family offices), there is a little-known IRS code that allows the seller to receive a partial cash payment and receive an income tax deduction for the balance of the appraised price.
Most Realtors may be familiar with a 1031 Exchange: identifying and setting up the purchase of “like kind” properties through a qualified intermediary and postponing the taxable event until the next transaction. This can be an involved process and at times confusing for a seller. It can also come with deadlines (including the threat of losing all the benefits if a deadline is missed) and may dictate a seller into overpaying for a replacement property to align with a deadline.
Many Realtors, however, are not familiar with the Internal Revenue Code (IRC) 170 Exchange, better known as a “bargain sale.” The IRS enacted this in 1917 and it is estimated that there are roughly 20,000 of these transactions occurring each year — with an approximate value of more than $8 billion. This transaction occurs when a seller donates the property to a charitable organization in return for a below-market cash payment and the balance (based upon a MAI appraisal) in the form of a charitable gift tax receipt. This can allow a seller with an asset that has been listed on the market for an extended period to enact a quick close with a tangible benefit. From a Realtor perspective, the seller pays a commission on the cash portion of the bargain sale transaction — plus, a subsequent listing may be available when the charitable organization turns around and sells the property quickly at the market value.
By way of example, University Realty received a donation of a luxury home in the Arizona Biltmore area, traded it for another property, resold it quickly and monetized it to benefit the ASU Foundation. The Realtor earned two commissions in a short amount of time. The sellers got a significant charitable gift tax receipt that they used to offset ordinary income taxes for the next five years. This property had deferred maintenance that the seller was unable/unwilling to do; University Realty completed the needed maintenance and sold it quickly at market rate.
There are various foundations and nonprofit organizations that conduct 170 Exchange transactions in Arizona and in other states. Due to the fact that there is a risk involved for these organizations, very few accept a high number of transactions and/or have the level of experience that is needed to see it through successfully. It’s important that a Realtor conducts some research to ensure the organization has a wide portfolio of transactions and that they are familiar with different types of properties or parcels.
If you are a residential Realtor who represents a high-net worth individual, or a family office that is eager to sell a hard-to-market property or a property that has been on the market for an excessive length of time, you may want to recommend that your client consult with their financial and tax advisor about utilizing the IRS170 Exchange program. With this program, the seller can execute an easy sale typically within 30 days or less. As long as the seller can utilize the gift tax receipt benefits to offset their present and future income — avoiding capital gains if the property is not a primary residence.
Brad has worked in the Arizona real estate industry since 2004. He manages the current ASU Foundation/University Realty asset portfolio, acquisition and redevelopment of all new Foundation properties and donations. Brad works with a team of seasoned real estate professionals having the ability to handle complex commercial, residential, industrial and raw land on behalf of the Foundation. University Realty is the co-developer of significant projects in the Valley including SkySong, Innovation Center, Mirabella at ASU lifelong learning facility in downtown Tempe; and an 8-story building in Washington, DC – just three blocks from the White House. Brad can be reached at 480-965-8098.
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