What is an IRS Section 170 "Bargain Sale"?
A "170 Bargain Sale" can be an excellent 1031 Exchange Exit Strategy!
Is an IRS Section 170 Bargain Sale the best option for you?
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In some cases it may be better to take less money for a piece of investment real estate (performing asset or not) if the trade off was a huge tax break on the disposition sale. Some individuals or business entities expecting to earn a substantial amount of income over the next few years, could benefit more from greater tax deductions than by making more money from a traditional sale. The best way to describe the IRC Section 170 "Bargain Sale", is to first explain what it is not... It is not a tax deferral savings vehicle like a 1031 Exchange. The IRS Section 170 (introduced in 1917) actually predates IRS Section 1031 (introduced in 1921). The 1031 Exchange is a well known tax-deferral real estate investing strategy that allows an investor to defer capital gains (rolled) into replacement property options that qualify in the exchange process as long as specific restrictive rules are followed. This is an excellent strategy to create and maintain generational wealth by deferring capital gains and using tax savings as leverage to buy other real estate assets instead of paying required taxes as compared to a traditional sale. However, starting down the 1031 Exchange pathway is typically a long-term decision and if one ever chooses to do a traditional sale in the future on a property that was a 1031 replacement purchase(s), the deferred capital gains rolled in compounds with the current capital gains due on the sale creating an even larger tax bill than before! That's completely acceptable if you intend to play through all the way until death for the heirs of the real estate to get a step-up in tax basis. Conversely, if that's not the plan, or if the potential of finding an acceptable replacement property to the exchange doesn't seem promising, then a Section 170 "Bargain Sale" may be a better tax mitigation or potential partial tax exclusionary option. Keep in mind, this type of sale is for owners of investment real estate who have a philanthropic desire to contribute to a qualified non-profit entity. Furthermore, although a qualified intermediary is not required for a section 170 sale as with a 1031 Exchange and there are no specific mandated timelines, it is very important to use a reputable and experienced real estate firm that specializes in this type of sale to ensure it is performed correctly. Schedule an appointment online now so we can help you with determining preliminary eligibility, then connect you to an experienced team of agents that can assist further in the potential sale to one of their qualified non-profits who may be interested in potentially placing an offer on your real estate property. If terms are met with negotiations, the good news is that it's possible to receive some cash and a very favorable tax deduction, currently up to 60% Annual Gross Income (AGI) for one tax season within the year of the disposition sale. Even better, depending on the amount of deductions available (each scenario uniquely analyzed) future tax deductions beyond the first year may be available to potentially provide future tax deduction savings, spread over an additional 5 years to offset future earnings. Moreover, the cash portion of the sale that is received can be placed using a 1031 Exchange to defer what taxes cannot be immediately eliminated (we can also assist with that process as well)
In conclusion, the section 170 "Bargain Sale" may be the best tax savings option for those with prior 1031 Exchanges looking to exit out of owning real estate without having to continue to exchange and only defer capital gains.. in the majority of cases when there is a high tax savings need due to high-net-worth or high expectation of future earnings, or a long length of ownership of assets that have depleted depreciation schedules and/or exorbitant amounts of capital gains taxes attached, it may be the absolute best option when compared to a traditional sale! There is only one way to know for sure.
Schedule a free consultation today!